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Tesla is ‘one of the market’s best secular growth stories’: Analyst

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CFRA Analyst Garrett Nelson joins Yahoo Finance to discuss Tesla's growth as it opens new gigafactories overseas, the EV manufacturer's production goals, and Tesla's position in the competitive EV space.

Video Transcript

- Welcome back to Yahoo Finance Live, everyone. Inflation has made its way to space. Elon Musk's SpaceX is the latest company to raise prices, citing inflation as the sole factor. The space exploration giant announced that it's raising prices for its launch business, and Starlink internet services. Some of the Starlink price hikes include its monthly services, increasing by 11%, and the baseline hardware price increasing by 10%.

- Well today marks the two year anniversary of the pandemic era low 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 rallied, but the best performing stock over the past two years has been none other than Tesla. Up more than 1000% over that period.

Here to discuss this and more, is Garrett Nelson, CFRA vice president and equity analyst. Garrett, thanks so much for joining us. I know we want to touch on Tesla's latest news out of Germany. But first on this meteoric stock rise and outperformance even for the year to date, what do you think has been going right for Tesla to catalyze this move?

- Sure, thanks for having me. Well, we think Tesla represents one of the market's best secular growth stories. And that's important at a time where growth is really being hurt by inflationary impacts. This is a story that's not immune to inflation inflation, but their growth is really being driven by company specific factors.

The growth for electric vehicles, and also the startup of two new factories, one in Germany. They just held the ribbon cutting. And then in Texas, where they have a grand opening scheduled two weeks from now. So, these are the reasons why we upgraded the stock from hold to buy in early January, because they're entering really a new growth phase with the startup of these two new factories that will increase their annual vehicle production capacity dramatically. And so that's what's really driving the earnings growth going forward.

- And got on top of that, we're also seeing that Tesla may have plans to double down in China to meet demand. 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 there.

- Yeah, their strategy really is to do what they can to increase production. They have a goal of increasing their annual auto sales from about a half million vehicles sold in 2020, to 20 million by the year 2030. So, that's growth of 40x that needs to happen. And so, they're going to have to really accelerate their growth by building new factories. The Texas and Germany factories essentially doubles their number of operating factories from two to four. And we believe they're looking at other factories around the world.

So this increased geographic diversification is really going to help Tesla's growth in other markets, and achieve economies of scale, which should help drive down their costs.

- Garrett, were of similar age. Usually not much good comes from dancing at our age, but what did you think of his dance moves yesterday in Germany, and can he meet these goals 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 he go on Dancing with the Stars anytime soon, but I'm not sure he's been invited. You know, as far as their initial production goals from the two factories, we view them as very achievable. The auto industry is really struggling 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 setting investor expectations. That's why the company has now beat earnings nine of the last 10 quarters. So, we think that 500,000 unit goal is achievable, and over time, they can really scale up. With these larger factories, it really takes time. It's several month process to scale up to full capacity, and you know, at the time where the entire industry is suffering with raw material shortages.

- How much of lead would you say Tesla has, relative to other legacy automakers like General Motors or Ford, who have also been raising their targets on electric vehicle production over the next several years? What will Tesla need to do in order to maintain that lead?

- We view a Tesla as having an enormous lead over all the competitors. It's why the legacy automakers have been announcing huge increases in their investments that they're dedicating toward electric vehicle growth. You really saw that in 2021, with some major announcements. GM, Ford, Volkswagen and others dedicating a lot more resources to growing, because everyone's playing catch up with Tesla.

And it's going to be very difficult to really compete with them longer term, because Tesla has a huge cost of capital advantage over competitors. So, they can fund growth of new projects very inexpensively. They're the largest automaker in the world by market cap, by a wide margin, despite not even having a fraction of the annual sales that some of the larger automakers have. So that's where 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 that they're making. They're dedicating a lot more resources to R&D, in our view, than a lot of the traditional automakers are.

- And speaking of traditional automakers, obviously we saw Ford, and perhaps other car makers may follow suit in splitting into two distinct businesses, one to focus on their combustion engines, and one specifically for their EVs. How much of a difference will that make if more companies get on board with this?

- Yeah, so what's really driving that is Tesla, because you have a company you 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 this huge valuation gap between Tesla, who's valued really like a tech company, we think appropriately, and legacy automakers. And the auto manufacturing business is a very difficult one.

So, that's why they're splitting their businesses, that decision from Ford to actually split the results of the electric vehicle business versus the internal combustion engine business. I think it's also a step that they could be taking to make a spin off easier. And we think that will happen probably in the next couple of years. You'll probably see that from Ford.