The bulls on Wall Street continue to pile back into Tesla stock, citing a host of potential catalysts.
In a note out on Friday, Deutsche Bank analyst Emmanuel Rosner said he believes the rally in Tesla stock is just beginning with several likely drivers for the company in 2023.
"We view 2023 as a pivotal year in which Tesla continues to grow volume at a high pace, enters new segments with Cybertruck and Semi, optimizes its manufacturing footprint, and benefits from IRA [Inflation Reduction Act] which will lower its costs and boost demand," Rosner wrote. "We see considerable room for upward revision to 2023 Street estimates from these factors, with additional upside potential to gross margin from full self driving, with every 5% improvement in global take rate on new sales boosting gross margin by another 80 basis points, which is not in our base case scenario."
The EV maker's stock is up more than 40% in the last three months, thumping the Nasdaq Composite's 8% gain and outperforming rivals Ford and GM.
Wall Street credits the push higher to optimism around new government legislation that will support the adoption of EVs in 2023 and beyond. Tesla's strong execution in the first two quarters of the year has also improved investor sentiment on the stock, which took a slight hit in August amid a broader market pullback.
Here's more on Rosner's call:
Price Target: $400 (up from $375)
Rating: Buy (reiterated)
Stock price movement assumed: +24%
Rosner sees margin improvement for Tesla:
The Deutsche Bank analyst expects improved manufacturing costs as a key profit tailwind for Tesla moving forward.
"While the company’s gross margin improvement has slowed down this year, due to costs and inefficiencies from Covid-related lockdowns and ramping up new factories, we believe Tesla is still on track to grow this metric in 2022," the analyst wrote. "More importantly, looking ahead to next year, we now forecast Tesla could lift gross margin by another 300 basis points year over year, thanks to positive mix shift towards lower cost of goods sold-production facilities and benefit from IRA’s [Inflation Reduction Act] battery production credits in the U.S."
Rosner added: "Starting from base cost of goods sold/ vehicle of $36k in 2021 (before impact of rising raw materials and inflationary costs which the company is largely offsetting through product price increases), we estimate Tesla could generate $2,400/vehicle (or 6.5%) average cost reduction from expanding its manufacturing footprint to lower cost of goods sold regions and facilities, and another ~$800/vehicle in US battery production credits in Fremont and Texas, averaged out on a global basis."
Altogether, he added, the "combined potential cost reduction of $3,200/ vehicle could represent a benefit worth 5.5% of average selling price, but we conservatively only boost 2023 gross margins by 200 basis points to 31.5% from 29.5%, representing a 300 basis point improvement from 2022 levels, and increase adjusted EPS from $6.60 to $7.15, considerably above consensus of $5.82."
Rosner's long-term view on Tesla:
Lower costs aren't the only Tesla tailwind in 2023 — the company will have new products too.
Rosner highlighted a potential demand boost from Tesla's Cybertruck and Semi vehicles that are expected to come to market in 2023.
"Longer term, we see more room to improve on gross margin and even higher potential on operating margins as volume ramps up," Rosner said. "We continue to view Tesla as one of most attractive stories in the autos sector thanks to its pricing power, superior cost structure, strong execution, and having secured supply and now establishing more meaningful capacity to support considerable growth."