Tesla's Musk answers one big question - but introduces many more

By Emily Bary

Tesla says it's still focused on a lower-cost car, but UBS thinks many aspects of it are 'still in flux'

Tesla Inc. Chief Executive Elon Musk just reassured investors on one big question, but a UBS analyst says he left many more in that wake.

Coming into Tesla's (TSLA) earnings call Tuesday afternoon, investors had been jittery about the company's low-cost Model 2 plans - which the company had signaled might be deprioritized as Tesla focuses on its robotaxi ambitions.

See more: Tesla's stock surges as Musk says affordable EV still in Tesla's future

On the call, Musk expressed a commitment to a lower-cost vehicle, which Wall Street sees driving growth. Analysts, though, aren't entirely sure whether the company is following through on the Model 2 it once promised. Rather, the company's future may contain a new car that utilizes some aspects of Tesla's current platform and some of the company's next-generation platform.

That sort of messaging "brings a whole new set of questions," UBS analyst Joseph Spak wrote, as he left the call with the view that many aspects of this more affordable car are "still in flux."

"What are they really, and what buyer are they targeting other than 'lower cost?'" Spak asked. "Lower cost may not be enough because of lower used Tesla pricing."

He also wondered if Tesla will be able to follow through on its new timeline, which calls for the new vehicle to be out by early next year, a step forward from Musk's previous target of the back half of 2025. The company has had production hiccups in the past. Spak said he is curious whether the company will have much to show for its "unboxed" manufacturing strategy.

"'Unboxed' manufacturing may be proving to be more difficult than believed, which limits cost savings opportunities," Spak wrote.

He kept a neutral rating on Tesla's stock, but brought his target price down to $147 from $160 in his note late Tuesday.

Opinion: Elon Musk gives Wall Street what it wants, but more pain could be around the corner

Investors, though, seemed satisfied with what they heard, and one analyst suggested the electric-vehicle maker may have hit a turning point after a dismal start to a year that has brought a 42% stock plunge through Tuesday's close. Shares were up 11% in morning trading Wednesday.

Baird's Ben Kallo commented that Tesla broke the "negative feedback loop" with its Tuesday afternoon earnings call.

The company "pulled forward the timeline for producing its new vehicle lineup" and teased that a possible licensing deal with an original equipment manufacturer for Tesla's Full Self Driving software might come before the end of the year, Kallo noted.

"We view these announcements as positives and see this as a turning point for previously bearish sentiment," he wrote.

Kallo has an outperform rating and $280 price target on Tesla shares.

By talking up an accelerated timeline for the lower-cost vehicle, Tesla "largely been put to bed" concerns that it might have no growth for years, RBC Capital Markets analyst Tom Narayan commented.

Narayan still sees a Model 2 in play for Tesla. "Our Model 2 math does not give credit to margin enhancement," he wrote. "Rather, we view the vehicle largely as a means to sell FSD," which is the company's Full Self Driving technology.

He rates the stock at outperform with a $293 target price, down a buck from before.

Read: GM's blowout earnings show 'long-awaited turnaround appears to be under way'

Analysts are looking beyond the most recent results, which showed a sharp decline in profit, and instead are focusing on the big picture from Chief Executive Elon Musk. While Musk isn't always one to cater to the market, he seemed to have heard investor concerns about the prospect that Tesla was deprioritizing the lower-cost electric vehicle it had talked up prior.

The "first impression for us is CEO Musk appeasing the market by accelerating new product launches to [the second half of 2025], thus leveraging existing capacity (3m units)," Jefferies analyst Philippe Houchois wrote in a note to clients.

Admittedly, however, "wording from the outlook raises the risk of compromises on product to accelerate launches," he added. Houchois has a hold rating and a $165 target price on Tesla shares.

Citi's Itay Michaeli wasn't sure the latest commentary from Tesla's management would sway the bears, even as he saw several positives.

"The quarter won't settle recent debates and consensus estimates still seem vulnerable, but with the stock down 42% [year to date], the favorable reaction makes sense," he wrote, as he lifted his price target to $182 from $180 but kept a neutral rating.

Michaeli wrote that he and his team "like Tesla's product pivot that appears to prioritize speed to launch/redesign on existing capacity (even at the expense of achieving prior cost reduction targets), as it aligns with our thesis that Tesla's primary issue is one of product freshness, not price."

-Emily Bary

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04-27-24 0653ET

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