Tesla Sales Model Gains Momentum; Will Others Join the Race?

Fully electric vehicles (EVs) are becoming more popular. There are numerous causes for this, including increased safety and vehicle emission requirements, technological advancements, and changing customer expectations.

However, Tesla (TSLA) and its unique business model can be credited for a large part of the public’s acceptance and enthusiasm for electric vehicles.

Let’s take a look at Tesla’s distinct business model.

Tesla uses the direct-to-consumer (D2C) sales approach, which is different from other automobile manufacturers, who sell through franchised dealerships. It has established an international network of company-owned showrooms and galleries, the majority of which are located in major cities.

In addition, Tesla has been working hard to improve its online sales approach. The company’s e-commerce growth strategies include expanding and enhancing IT systems, moving all sales online, and reinventing the physical retail experience for customers.

Tesla Dominates the EV Market

Tesla achieved remarkable production and delivery figures in the first quarter by selling fully electric cars through its e-commerce platform and company-owned storefronts. In the first quarter, Tesla produced 305,407 vehicles and delivered 310,048 units.

Notably, Tesla’s revenues climbed by 81% year-over-year to $18.8 billion, and earnings per share increased by 246% to $3.22.

What’s more! Tesla is positioning itself to further change the automotive industry and speed up the world’s transition to sustainable energy with existing facilities still ramping up production and new plants due to come online soon.

Many analysts were delighted by Tesla’s performance and believe the firm has handled the continuing supply deficit situation admirably.

Auto Dealerships Seem to be at Risk

The COVID-19 pandemic has completely disrupted the auto sales industry. Consumer behavior and attitudes have shifted more towards internet purchases as a result of the pandemic. Buyers are becoming more comfortable ordering a car online following a test drive at a dealership, just like they are with other items. This allows customers to save time and energy.

Also, manufacturers have realized that car sales remained strong despite the fact that there were fewer cars in showrooms due to chip shortages. They learned that the massive expense of having millions of cars in inventory, which would just sit on a lot, was no longer required. They could now manufacture each vehicle to the requirements of the buyer and sell them directly to consumers.

Notably, many EV-focused businesses, such as Rivian (RIVN) and Lordstown (RIDE), have also opted for a direct-to-consumer model. This strategy may be pursued by traditional automakers as well, as they migrate to EVs.

As a result, buying a car through a dealer may become obsolete in the future.

However, the elimination of the middleman may not result in improved prices for customers. With inflation at all-time highs and ongoing supply-chain concerns, car prices are expected to rise, at least in the short term.

Below, we discuss two such car stocks that are focusing on the direct-to-consumer approach.

Mercedes-Benz (DDAIF)

Mercedes-Benz is a German automaker that produces and sells cars, trucks, buses, and vans.

Over the last few years, Mercedes-Benz has been developing its direct-to-customer approach. The corporation has already implemented its D2C sales model in Sweden, South Africa, and India. Apart from that, Mercedes-Benz is concentrating on electric vehicles and expanding its top-end segment.

Despite continued semiconductor shortages, Mercedes-Benz Cars reported a solid adjusted Return on Sales of 16.4% in the first quarter. Further, revenues increased by 8% in Q1, thanks to an improved product mix and stable net pricing.

Furthermore, TipRanks’ Insider Trading tool shows that insider confidence in Mercedes-Benz is currently Very positive, as corporate insiders bought shares worth $608.7K in the last three months.

On TipRanks, Mercedes-Benz has received a Strong Buy consensus recommendation from Wall Street analysts, based on 16 Buys and two Holds. With an average DDAIF price target of $92.54, the current market price of $65.38 implies 41% upside potential over the next 12 months.

Carvana (CVNA)

Next up is Carvana, a leading e-commerce platform for buying and selling used cars. Here, buyers can browse a list of used cars, purchase one online, and have it delivered to their door by a company driver, a service that is accessible in most parts of the United States.

According to the company’s most recent financial report, the digital strategy resulted in substantial revenue growth. Carvana’s sales in Q122 increased 56% year-over-year to $3.5 billion, exceeding the $3.39 billion consensus expectation. However, net loss per share increased significantly to $2.89 in Q122 from $0.46 in Q121, exceeding the Street’s loss per share forecast of $1.42.

Following the Q1 earnings results, Stifel Nicolaus analyst Scott Devitt lowered the price target to $140 from $170 per share to reflect the “recent challenges in the business and the weaker backdrop for used vehicle demand.”

Though the five-star analyst is concerned about near-term difficulties, he remains optimistic about the long-term fundamentals, believing that “the company continues to capture market share and develop the assets needed to realize significant leverage at scale.”

As a result, Devitt reiterated a Buy rating on the stock.

In addition, investors continue to be positive about Carvana stock. According to TipRanks’ Stock Investors tool, 3.5% of the investors holding portfolios on TipRanks have increased their stake in CVNA stock in the last 30 days. Furthermore, 4% of these individuals have increased their holdings in the past week.

Overall, the Street is cautiously optimistic, with a Moderate Buy consensus rating based on 11 Buys and nine Holds. The average CVNA price target of $149.58 implies 158% upside potential.

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