CFRA analyst Garrett Nelson joins Yahoo Finance to discuss Tesla’s growth as it opens new Gigafactories overseas, the EV maker’s production goals and Tesla’s position in the competitive EV space.
video transcript
– Welcome all of you again to Yahoo Finance Live. Inflation has made its way into space. Elon Musk’s SpaceX is the latest company to raise prices, citing inflation as the only factor. The space exploration giant announced that it is raising prices for its launch business and Starlink Internet services. Some of the increases in Starlink’s price include its monthly services, which increased by 11%, and a 10% increase in the price of baseline hardware.
Well, today marks two years less of the pandemic era in the stock market. That was on March 23, 2020 when the S&P 500 closed at 22.37. Since then, the broader market has boomed, but the best-performing stock over the past two years has been none other than Tesla. Up more than 1000% in that period.
To discuss this further, is Garrett Nelson, CFRA Vice President and Equity Analyst. Garrett, thank you so much for joining us. I know we want to touch on the latest Tesla news from Germany. But first on this meteoric stock growth and outperformance year-over-year, what do you think has been right for Tesla to catalyze the move?
– Sure, thanks for having me. Well, we think Tesla represents one of the best secular growth stories on the market. And this is important at a time when growth is really being hurt by the effects of inflation. It’s a story that isn’t untouched by inflation, but their growth is actually being driven by company specific factors.
development for electric vehicles, and also the opening of two new factories in Germany. He only did ribbon cutting work. And then in Texas, where he has a grand opening two weeks from now. So, that’s why we upgraded the stock from hold to buy in early January, because they’re really entering a new growth phase with the startups of these two new factories that will dramatically increase their annual vehicle production capacity. will increase substantially. And so that’s really what’s driving earnings growth going forward.
— and on top of that, we’re also seeing Tesla have plans to double that up to meet demand in China. What is the strategy there? And then against that backdrop where you have the Russia-Ukraine conflict, now with this manufacturing facility in Germany, and then you have some of these COVID production shutdowns in China as a result of some of these outbreaks.
– Yes, their strategy is really to do what they can to increase production. They aim to increase their annual auto sales from about half a million vehicles sold in 2020 to 20 million by 2030. So, that’s an increase of 40x that needs to happen. And so, they have to really accelerate their development by building new factories. The factories in Texas and Germany essentially doubled their number of operational factories from two to four. And we believe they are looking at other factories all over the world.
So this increased geographic diversification is really going to help Tesla’s growth in other markets, and help achieve economies of scale, which will help drive down their costs.
– Garrett, was of the same age. Usually dancing in our age doesn’t bring much good, but what did you think of his dance moves in Germany yesterday, and can he meet these goal of 500,000 vehicles a year from the Gigafactory?
– Sure. Well, on the first part of the dance moves, you know, I don’t recommend her going on Dancing With the Stars anytime soon, but I’m not sure she’s invited. You know, as far as their initial production targets from the two factories, we see them as very achievable. The auto industry is really grappling with chip shortages and supply chain issues. And so, you know, these are more modest goals that we think are achievable.
Tesla has become very good at meeting investor expectations. So the company has now outperformed nine out of the last 10 quarters. So, we think the 500,000 unit target is achievable, and over time, they could get really big. These big factories really take time. To scale up to full capacity is a process of several months, and you know, at a time when the whole industry is facing a shortage of raw materials.
— How much leadership would you say Tesla has relative to other legacy automakers like General Motors or Ford, which are increasing their targets on electric vehicle production over the next several years? What will Tesla have to do to maintain that lead?
– We see a Tesla as a huge edge over all competitors. That’s why legacy automakers are announcing a huge increase in their investments that they are dedicated towards electric vehicle development. You really saw that in 2021, with some major announcements. GM, Ford, Volkswagen and others are devoting far more resources to developing that, because everyone else is playing with Tesla.
And it’s going to be very difficult to actually compete with them in the long run, because Tesla has a huge cost of capital gain over competitors. Therefore, they can finance the development of new projects very cheaply. They are the world’s largest automakers by market cap, by a wide margin, despite not even accounting for a fraction of the annual sales that some of the larger automakers are. So we think Tesla really has an advantage.
And also, they’re doing a lot of internal R&D. We think it really shows up when they talk about their battery technology and some of the innovations they’re making. In our view, they are devoting much more resources to R&D than traditional automakers.
— and speaking of traditional automakers, clearly we saw Ford, and perhaps other carmakers follow suit to split into two separate businesses, one to focus on their combustion engines , and one specifically for their EV. If more companies join it, how much difference will it make?
— Yeah, so what’s really going on is Tesla, because you have a company that you’ve valued, you know, north of 100 times earnings. And then, you have traditional automakers, many of which are still trading at PE multiples in the high single digits. So, there’s just such a huge valuation gap between Tesla, which is really valued like a tech company, we think appropriately, and legacy automakers. And the auto manufacturing business is very tough.
So, so they’re divesting their businesses, Ford’s decision is to really split the results of the electric vehicle business versus the internal combustion engine business. I think that’s also a step they can take to make the spin off easier. And we think that’s probably going to happen in the next few years. You’ll probably see it from Ford.
