By Michael Elkins
Morgan Stanley reiterated an Overweight rating and $200.00 price target on Tesla, Inc. (NASDAQ:TSLA) as the electric vehicle giant continues to invest their cost leadership and industry high margins into lower prices.
Following the company's 1Q results, Morgan Stanley held discussions with a number of clients about what Tesla's industry leading margins would mean for legacy OEMs. If Tesla ‘weaponizes’ their cost leadership in the form of price, does this impair the economic returns of the EV spending plans of legacy players?
Analysts believe the answer is yes. So much so that they are questioning whether this is the ‘moment’ where the Boards of the legacy OEMs can reconsider dialing back the magnitude and timing of their EV capex and R&D plans. Allowing more time for the ICE run-off to generate cash as we enter a more uncertain macroeconomic era.
They wrote in a note that “Even before Tesla reduced the base price of a Model Y in the US by nearly 30% YTD, we struggled to see how Detroit could achieve a ROIC on their EV investment anywhere near their WACC, or even a positive NOPAT margin at all. The issue is compounded by the potential risk that legacy auto investment may be based on out-of-date (potentially obsolete) battery technology, manufacturing processes, and insecure supply chains.”
Investors may be wondering if Detroit even has a choice other than to keep spending on EV advancement. However, the analysts are not suggesting Detroit needs to completely halt spending on EVs entirely, but that now could be a moment of consideration to exactly when, where, how much, and with whom such spending could be executed.
“So while the path of least resistance may be to think that Detroit is backed into a corner,” writes the analysts, “we believe some of the best decisions can be made during such times. Tesla’s ‘new era’ of competition may, perhaps paradoxically, accelerate positive change in capital discipline for Detroit.”
Shares of TSLA are up 1.25% in afternoon trading on Friday.