Tesla Inc (NASDAQ.TSLA) has triggered a price battle in electric vehicles. Analysts believe this will have “industrywide consequences”. With a 40% price cut for Elon Musk’s carmaker, analysts believe it will be a price war that will have “industry wide consequences”.
The Austin, Texas-based EV manufacturer, has slashed its Model 3 and Model Y prices by up to 20% in the US, Europe and China.
Patrick Hummel, UBS analyst, stated that these cuts “put pressure on all competition in the mass- and premium-entry segments”, both in EVs and in vehicles powered by internal combustion engine.
UBS predicts a 40% drop in earnings by 2023.
He expects Tesla to continue expanding volumes aggressively as the technology and cost leader in EVs, leveraging its superior cost structure and overcoming all legacy competitors and smaller EV player players. This is considered “the beginning for an industry-wide shakeout”.
This is despite US vehicle sales falling for three consecutive months, 14.9mln to 13.2mln October through December. Meanwhile, new car dealer inventory continued to creep up and European backlogs shrinking for ICE and EV cars.
Hummel stated that others are following Tesla’s lead in China. Looking across the market, Hummel also said that legacy OEMs like Volkswagen Group (XETRA :VOW), Stellantis NV NYSE:STLA, EPA :STLA), Ford Motor Company NYSE:F, and General Motors Company NYSE:GM “will have to follow” but with higher costs, thereby threatening the story of EV margin parity.
It is also expected that ICE pricing will be affected by the increase in production and inventories, despite a decline in demand towards the end last year.
Analysts expect that the financial arms of US OEMs and German OEMs will be under pressure. Profits in China joint ventures are “structurally at-risk”.
UBS favors luxury over premium. Mass OEMs are at the bottom of the market, and auto suppliers are seen as “a better spot to hide” with mentions of Vitesco, Aptiv, and Valeo.
Ferrari (NYSE:RACE), is considered “immune”, and along with the Italian stallion Porsche AG, (ETR:P911), is seen to be the best positioned. A new EUR115 target for shares has been raised from EUR105 to reflect an flat EPS trend in 2023.
Mercedes-Benz is the stock that has the most favorable risk/reward ratio. There’s a 10% buyback opportunity and Mercedes-Benz shares are up to EUR79, which was EUR72.
Tesla’s EPS and price target were reduced by 40% to US$220, from US$350. This is to reflect aggressive price reductions. However, analysts still see Tesla as a “clear winner of the industry shakeout thanks to cost leadership and technology”, so the ‘buy’ rating was reaffirmed.
Other analysts agree with this sentiment, with Deutsche Bank hailing pricing as a “bold offensive step”.