Stomping on the accelerator, Barclays analyst Dan Levy surged into the automotive space, initiating coverage on a mix of 17 separate car and car parts companies.
Laying out a “two clocks framework” for analyzing the automotive sector, Levy explained how some companies are focusing on the near-term cycle for the industry, which is highlighted by high inflation and recession fears depressing demand for new cars — at the same time as low inventory and high prices (and profit margins) give automotive companies a boost.
Other companies are taking a longer-term view — often to the exclusion of the near-term — gambling everything on the expected eventual demise of the internal combustion engine. They’re hoping that enough car buyers will convert into electric car buyers in time to create a new market that they can dominate, before they run out of cash.
And then there’s Tesla (NASDAQ:TSLA). In Levy’s view, Tesla is the single best car stock balancing near- and long-term strategies for dominating the car industry. It also appears to be Barclays’ top pick in the sector.
Why does Levy prefer Tesla to all the rest?
Beginning with the obvious, Tesla’s tremendous profit margins (nearly 17% last year), powerful free cash flow ($7.5 billion), and towering pile of cash (more than $16.4 billion net of debt) give it “near-term financial strength” that few other automotive stocks can match. Although Tesla is still a smaller car company than the industry’s giants at present, it boasts profit margins roughly twice the industry average, and a simple and vertically integrated business model that helps keep costs low. This will permit Tesla to sacrifice some profit margin as it wages a price war with companies such as Ford and General Motors as they attempt to join the EV race, and help it to undercut its rivals on price so as to grow market share and sales volume.
Tesla may not make it all the way to its stated goal of selling 20 million EVs by 2030. But consensus estimates see the company growing sales to at least 3.4 million units by 2026, and roughly doubling that number to 6 million or 7 million units by 2030. Levy himself takes a more conservative stance, assuming 5.5 million units. Whichever production number turns out to be correct, the big question surrounding Tesla and its car production volume is pricing:
Simply put, the longer Tesla holds the line on prices, the fatter its profit margins — and profits, period — will get. But the more it competes on price, the greater its sales will be, and the bigger its market share, even as the company commands some premium profit margins relative to its competition.
There is of course, the risk that competition alone may force Tesla to cut prices whether it wants to or not, and Levy acknowledges this risk. If that happens, profits could shrink and Tesla’s ability to compete on price when and where it wants could be limited. Still, on balance Levy thinks the stock is positioned well to outperform the market.
To this end, Levy rates Tesla an Overweight (i.e. Buy) and puts a $275 price target on the stock. At current valuation, he sees a 29% one-year upside for the shares.
So, that’s Barclays’ view, what does the Street of the Street have in mind? The current outlook offers a conundrum. On the one hand, based on 22 Buys, 6 Holds, and 3 Sells, the stock has a Moderate Buy consensus rating. However, after soaring so high this year, the analysts expect shares to cool down and anticipate downside of 5% over the coming months. (See TSLA 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.
