Investors Should See Tesla's Price War As An Opportunity

As Tesla started to slash the prices of some of its electric vehicles at the beginning of the year, it jolted the auto industry and triggered the start of a price war - weeks later, Ford also announced that it would lower the price of its Mach-E as well.

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Investing in electric vehicles has been viewed as a long-term trend for quite a while, but there is certainly a compelling entry point for investors that had been waiting to enter the market.

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Garrett Nelson, a CFRA equity analyst, said, "It has really become a stock picker's market this year.". Despite the fact that electric vehicles are becoming increasingly popular in the U.S., they are still a small proportion of all automobiles on the road. Based on data provided by Edmunds, EVs made up about 5% of the total number of vehicles sold in the U.S. in 2022. Compared to just a year ago, that represents nearly double the sales of just a year earlier, demonstrating the rapid growth of the segment.

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Jessica Caldwell, Edmunds' executive director of insights, told Trade Algo that the company expects sales to grow quite significantly in the coming years. There are a lot of new products hitting the market as a result of this, she continued.

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There is already a noticeable impact of the increased competition on the industry. Despite the fact that Tesla is still the market leader in new electric vehicle sales, this lead is shrinking. Tesla will account for about 59% of new electric vehicle sales in 2022, compared to 66% in 2021, which was a reduction from 66% in 2021. There was growth in market share among Hyundai/Kia, Ford and Rivian brands in the past year.  

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“Electrification is one of the inevitabilities of the future,” says Brian Sponheimer, a portfolio manager at Gabelli Funds who sees the trend as inevitable.

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In an Effort to Regain Market Share

Several reports have suggested that Tesla is cutting prices as part of a strategy to regain market share both at home and abroad. In the U.S., the automobile maker lowered the cost of all new models by as much as 20%, as well as lowering prices on a few models in Europe as well. As part of an effort to entice buyers, similar price cuts have been made in China.  

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There is also the possibility that the lower prices in the U.S. may help to qualify the cars for the federal EV tax credits that are available through the Inflation Reduction Act, which is another incentive for potential consumers.

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The move was greeted with cheers by some analysts. The Berenberg Group upgraded shares of the automaker from a hold to a buy, saying that even if the cuts hit profits, they are part of a larger strategy the company is pursuing. In a note published on January 19, Dan Ives, analyst at Wedbush Securities, said that the price cuts in China have been a great success so far.

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Obviously, if volume doesn't pick up sufficiently as a result of the lower prices, then we will have problems in the future if profits don't increase. According to a note that was published on January 17 by John Murphy at Bank of America, revenue per vehicle may fall by 10% to 20%. Meanwhile, he predicts that Tesla will increase its volume by 53% in 2023, compared to the current year.

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According to Edmunds data, Tesla's cutting of prices caught the attention of consumers and boosted interest in the company's cars. There has been an increase in the amount of attention given to Teslas by site shoppers in the past week, up from 1.9% in a week earlier, and the Tesla Model Y has become the second most researched vehicle on the site, up from the 70th a week earlier.

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The price target on Tesla shares was raised by RBC Capital Markets to $233 from $226 on Monday as a result of strong consumer response to Tesla's price reduction, or a 17% increase on Friday's closing price.

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In response, Ford responded by lowering the price of its Mustang Mach-E crossover, the vehicle that is directly competing with Tesla's Model Y on a per-unit basis. As a result of the price decrease, not all Mach-E models will be profitable on a per-unit basis. Even so, Ford is nearly doubling its annual production from 78,000 to 130,000 vehicles in order to remain competitive in the automotive market.

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As of yet, however, General Motors has chosen to maintain its own prices as they have for many years.

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In a call with analysts, CEO Mary Barra said Tuesday, when asked about Tesla's price cuts at the time and Ford's price cuts at the time, that she felt that the company was well positioned based on its strong product portfolio and the interest that we have at the prices that we have already announced. “Despite the fact that it is only the first month of the year, we have already seen a very strong interest in our products from our customers."

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As to what effect the price cuts will have on sales in 2023, it's still unclear, but it's expected that it will be a problem for automakers as a result of the price cuts.

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Gene Munster, managing partner at Deepwater Asset Management, said that the headwinds in the first half of the year have been dramatic as a result. “In my opinion, it will be measurable in some way."

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Shakeup of the Industry

Tesla's market share may be eroding as a result of increased competition, according to some analysts. Others believe that the company's first-mover advantage and popular brand will play a critical role in its future growth.

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The market is expected to reach a point of oversaturation within a few years as dozens of new vehicles will be introduced to the market, Nelson believes, which will overwhelm consumers with their choices.

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“I think you're going to see a lot of traditional automakers and EV manufacturers such as Lucid, Rivian, Fisker, and others really struggle in the coming quarters," he said. Tesla stock is rated as a buy, Ford stock is rated as a buy, and General Motors stock is rated as a sell.

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In addition to the manufacturing aspect, there is also the question of reach. Tesla has been focusing solely on electric vehicles and has built its factories for that purpose and while traditional OEMs have large established factory networks and capital to invest into new development, the company has chosen to focus on only electric vehicles.

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“The fact that Tesla has built from the ground up certainly gives them an advantage when it comes to being able to build cars at a cheaper price than their competitors, which translates into a customer advantage,” Munster said, adding that he believes this helps Tesla build cars at a lower cost than its competitors.

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While Tesla may be ahead in some areas, it may be falling behind in others. Caldwell says that the company's product line-up is getting old as a result of the age of its vehicles. The Cybertruck is still awaiting consumers' approval, but there are no other new models on the horizon at the moment.

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The Benchmark Company analyst, Mike Ward, said there are still issues with electric vehicles that make them impractical for large groups of consumers who use them on a daily basis. In addition to GM and Ford, he has given buy ratings to both of them.

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As an example, if you live in Vermont and you want to go skiing, it is not very practical, he said, because of the weather. “We do not have enough charging stations, we don't have the range because at high altitudes, at fast speeds, in cold weather, or in volatile weather conditions, you lose a lot of range,” Ward said.

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Tesla is not as well suited as some of their competitors to capitalize on the growth of electric vehicles in the commercial sector, such as fleets of commercial pickup trucks and vans. Ward says that Ford currently has the best electric pickup truck on the market, and that they control most of this market in the U.S. According to Ward, General Motors and Ford control most of that market.

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“I don't think your plumber who owns a pickup truck will be able to afford to buy the Cybertruck for $100,000,” said Ward.

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There are other factors that need to be considered as well, such as the fact that incumbent automakers still have the monopoly on traditional vehicles while offering other forward-looking technologies, such as hybrids and vehicles that run on diesel or hydrogen fuel.

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The traditional auto companies have a diverse lineup of vehicles, which is important for a number of reasons, according to Sponheimer. “You will likely be able to reach a broader array of consumers with a wider range of needs if you offer more cars for sale.”. "We should take advantage of those other more conventionally powered vehicles, as they will be around for decades to come, and we can use them to help minimize the ups and downs that might come with the electrification program in the future."

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Investing Breakdown

Automakers will continue to hold market share if they produce the most value for consumers, Munster said.

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In some cases, that means sticking with Tesla no matter what its ups and downs may be. The company, despite its issues with CEO Elon Musk, is generally well-received on Wall Street, and it is one of the most-liked auto companies in the world. Approximately two-thirds of the analysts who cover Tesla say that the stock is a good investment. As well as bulls still seeing tremendous upside to the stock, Morgan Stanley's Adam Jonas continues to have a $220 price target on the shares, implying that it could rise by nearly 16% from Friday's close.

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Traditional approaches may be preferred by others.

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“As far as I’m concerned, it would even be feasible for someone to say, ‘I’m going to buy a Ford even if they aren’t here today, because I believe they will have the best value and the best options,'” said Munster.

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Investors looking for companies outside of the U.S. with a lot of growth should also consider Toyota, Hyundai, Kia or Mazda if they are looking for companies with a lot of growth outside of the U.S. Additionally, traditional companies tend to pay dividends more often, which is also a very important factor in today's choppy market. As GM pays a dividend of almost 1% and Ford pays a dividend of 4.4%, both companies pay dividends.

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It is important to note that even if the stock price of the company doesn't change, investors will still be able to see that payment return.

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“Ford is one of those companies that we really like. It pays dividends, it has strong balance sheets, it generates strong cash flow and it is able to continue returning cash to shareholders.” Nelson added, adding that Ford could also announce share buybacks soon, another benefit to investors.

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Taking a step beyond the car

In addition, Sponheimer adds that there is a wide variety of ways of investing in the trend without taking the risk of buying shares of a startup that could go out of business due to one dud investment vehicle, which can be quite risky.

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“One of the things that we are really focused on as a firm is reducing the product risk and choosing the technologies that we think will be of great importance for all automakers,” he explained.

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The company will also invest in companies that make things like axles and drivelines for trucks and SUVs, such as Dana, an auto supplier that makes axles and drivelines for trucks and SUVs. As well as BorgWarner, another supplier, the company also likes Garrett Motion, a smaller manufacturer of turbochargers, which produces them in small quantities. This year's best ideas were named by the magazine and one of them was ChargePoint, a company that makes electric vehicle charging stations.

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“From a firm perspective, we are less focused on trying to figure out the actual products that will win and are much more interested in the whole ecosystem as a whole,” he said.

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A great deal of potential can also be found with firms that manufacture batteries, one of the key parts of electric vehicles, whose share prices have also soared in recent years. A number of battery companies, including Freyr Battery, Sunrun, and Enphase, have been rated buy by Goldman Sachs.

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Investing in an electric vehicle-focused exchange traded fund is another way to get the upside potential of upstart companies like Tesla while balancing it with the opportunity for stability. Since the beginning of the year, the Global X Lithium & Battery Tech ETF has gained nearly 18%, which includes Tesla and Rivian. 

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The iShares Self-Driving EV and Tech ETF, which is a broader fund, has increased its value by more than 22% this year. This group of companies includes Toyota, General Motors, Ford, as well as Apple and Alphabet.

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It is also worth noting that KraneShares Electric Vehicles and Future Mobility Index ETF has gained nearly 18% this year and is comprised of Tesla, lithium producer Albemarle, and auto tech supplier Aptiv. and more.