Not all of Elon Musk’s actions make sense to the casual observer. However, one decision made by Tesla (NASDAQ:TSLA) appears to be driving the required outcome.
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In response to lower demand, the EV leader has started reducing the prices of its models. After Musk said that price cuts on certain models had stimulated demand, Tesla recently slashed the U.S. prices of its two most expensive EVs – the Model S and the Model X.
These actions make complete sense to Morgan Stanley analyst Adam Jonas, who thinks they are set to become regular occurrences.
“We believe EV price cuts are not a fad, but a trend. While subject to volatility, investors should anticipate further price cuts in EVs with cost-leader Tesla setting the tone,” the analyst explained.
Jonas sees the price cuts as “rational competitive behavior” for several reasons. Amongst them is the need to stay one step ahead of the competition.
“If Tesla doesn’t cut price, someone else will,” says Jonas.
The company also wants to further establish its leading position and set the “industry standards for industrialization of EV manufacturing and infrastructure at higher scale.”
Tesla already has scale and continues to expand. Moreover, there’s an affordability gap which Tesla can fill – particularly for $25,000 vehicles with a monthly payment under $400.
“As many legacy OEMs have abandoned entry-level ICE offerings,” notes Jonas, “it’s up to cheaper EVs to fill the gap.
Falling lithium prices can also help lower prices. And while Jonas concedes that lower priced vehicles will result in reduced margins than those Tesla has become accustomed to in recent years, he believes there is a “longer-term payback on monetizing the installed base from recurring revenue (services, aftermarket, charging, software, etc).”
So, how does this all translate to investors? Jonas maintained an Overweight (i.e., Buy) rating, while his $220 price target implies one-year share appreciation of 16%. (To watch Jonas’s track record, click here)
Looking at the ratings breakdown, based on 20 Buys, 10 Holds, and 3 Sells, the consensus view is that TSLA is a Moderate Buy. The analysts see shares gaining 12% in the months ahead, given the average target currently stands at $212.89. (See Tesla stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
