Tesla (NASDAQ:TSLA) stock has benefitted from the company’s leadership position in the EV market and strong profitability. However, continued excess production over deliveries, lower pricing, and increased competitive activity are raising concerns over its future automotive gross margins and stock price.
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Tesla’s automotive gross margins are on a downward trajectory after peaking at 32.9% in the first quarter of 2022. Cost headwinds and price cuts to drive demand are to blame for this decline. Furthermore, continued excess production suggests that Tesla would need more price cuts to drive deliveries, which will impact its margins.
In Q1, Tesla produced 440,808 vehicles and delivered over 422,875 vehicles. Commenting on Q1 deliveries, Jefferies analyst Philippe Houchois said, “Continued excess production over deliveries will keep the debate going on price elasticity vs. general demand weakness and the impact of IRA subsidies.”
Nevertheless, Houchois is bullish about Tesla, and his price target of $230 implies 18.09% upside potential from current levels.
While Houchois is bullish about TSLA, Bernstein analyst Toni Sacconaghi believes that the company will need to lower prices to achieve its volume targets in 2023 and 2024, which will pressure its margins.
Sacconaghi said that Tesla’s inventories increased to 97,000 units, about five times higher than the prior year. However, the analyst highlighted that the number is still relatively low compared to peers.
Sacconaghi recommends a Sell on TSLA, and his price target of $150 implies 22.99% downside potential.
What’s the Prediction for TSLA Stock?
Wall Street analysts are cautiously optimistic about TSLA stock, which is up over 58% year-to-date. It has received 20 Buy, 10 Hold, and three Sell recommendations for a Moderate Buy consensus rating. These analysts’ average price target of $218.50 implies a further upside potential of 12.18% from current levels.
Bottom Line
Tesla’s focus on cost reduction and improving efficiency will likely support its margins in the long term. Additionally, the company’s pricing strategy should help it maintain industry-leading margins in the coming years. However, increased competition and expected price reductions to support volumes could pressure near-term margins and restrict the upside in TSLA stock.
