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How Tesla plans to compete in China's intense EV market

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Wells Fargo Autos Analyst Colin Langan joins Yahoo Finance to discuss Tesla's recent quarterly earnings, how Tesla was able to maintain production, and the company's continuing growth.

Video Transcript

BRIAN CHEUNG: Welcome back. Obviously we've been talking about Tesla earnings, which reported after the bell yesterday. Record revenue and profits coming in for the third quarter alongside deliveries in the quarter of 241,300 units.

So let's get a deeper dive into the earnings report with Colin Langan, autos analyst at Wells Fargo. Colin, great to have you on the show this morning.

The CFO and the master of coin, I guess if you will, was saying yesterday that they're facing supply-chain issues as well, but they said the only way to address that in the immediate term is just to build more cars on the existing production lines. So what is the strategy for Tesla? Have they done a good job mitigating some of these macro issues, in your view, based off of the earnings that we got yesterday?

COLIN LANGAN: Yeah, I mean, of course. I mean, their production was up sequentially. I mean, if you're looking at the global auto industry, everyone is struggling to get enough chips. I mean, I think they benefit from being more vertically integrated, but they could possibly swap out some of the chips. I mean, they are benefiting that they're much smaller than other automakers, so it's not as much of a piece of the pie of overall global semi demand.

But, you know, it's an anomaly in the quarter. I think we'll be seeing pretty much every automaker other than maybe Ford, who had a pretty bad Q2-- most of them are going to see production down because they couldn't get enough semi chips.

BRIAN SOZZI: Colin, has Tesla's margins, have they hit a short-term peak? Look, they have a lot of production coming up in the months ahead. That will drive some inefficiencies. What's your outlook?

COLIN LANGAN: I mean, I think one of the main issues that, you know, keeps me sort of equal weight is as you go forward, raw-material costs have already rose quite dramatically. I mean, we're looking at cobalt, lithium, aluminum all up 40% year over year, if not more on many of those. That's driving the battery costs up dramatically.

Tesla is very smart in how they do their battery strategy, so a lot of their-- a lot of their contracts are long term. But the problem is as you go into next year, you're going to see those contracts reset. And based on my numbers, it's probably about a $1,900, $2,000 per vehicle headwind once all of those contracts reset. So some of it has already impacted them, but I have a feeling a lot is to come, and that will put margin pressure.

And then on top of it, they're going to be ramping Austin and the Berlin plants. There's usually inefficiencies around that as well. So I do think this is going to be a temporary peak margin as those raw-material costs come and the new plants ramp with some inefficiencies.

BRIAN CHEUNG: Colin, can we talk about China? What's the bigger story there? Is it the supply side or is it the demand side? Because we know that they've been ramping up their expectations for the amount of vehicles that can roll out from their Shanghai plant, but obviously also demand the big driver there when you consider them continuing to gain market share. I believe up over 1% in terms of Tesla vehicles by region out there. What do you see as the bigger story for them in that particular area of focus?

COLIN LANGAN: Well, I mean, this quarter benefited from the rollout of the Model Y Standard Range version, which is a lot cheaper. One of the reasons why the quarter was pretty impressive, they actually grew margins with that cheaper model rolling out.

You know, I think that's going to be a big driver-- that has been a big driver of demand there. We'll see long term. I mean, EV competition in China is very intense. Media coverage of them has been mixed over the last year or so. So, you know, I think a lot of the story going forward is going to be rolling out the Y in really Europe, kind of filling out the footprint-wide space there and then launching the Cybertruck in the US.

So, you know, China a very important part of the story in the next quarter or two, but I think it will start shifting more global again as we go out a full year.

JULIE HYMAN: Hey, Colin, listening to you talk, you sound pretty positive, and yet your price target on the stock is $660, which is below where it is right now. We've had some of your peers in the analyst community really coming out and ratcheting up their forecasts. Why do you think that we could potentially see the shares go down?

COLIN LANGAN: Well, I mean, I have an equal weight, and actually I did raise my price target to $860, so I don't have the downside on this one.

JULIE HYMAN: OK.

COLIN LANGAN: What I say is I look at it right now, this is a stock, obviously a lot of news-driven features. I look at it that, you know, one, if we go over-- we have the raw-material headwind I mentioned. I think there's not enough scrutiny on the autopilot potential for regulation. I mean, NIST is doing an investigation. They just hired somebody who is really pro more regulation on autonomous functionality. So I think there's a higher risk there that maybe, you know, they might have to limit some of the functionality of autopilot, which is a big selling feature. So I think that keeps me very cautious.

On the other side, there is the launch of Austin and Berlin and the hype that comes with that and the excitement that comes with that. And there's still debate-- it keeps getting, you know, ponied around, but there is potential for US EV credits. Tesla would be really at the heart of benefiting from US EV credits if they could get those credits back. So there's a really mix I could see over the next six months of both positive and negative, and that's really why I'm sort of staying equal weight right now.

BRIAN CHEUNG: All right, Colin Langan, autos analyst at Wells Fargo. A reminder that shares of Tesla right now at around $884. That's a 2% increase today. Over 25% up, though, year to date. Again, Colin, thanks so much for stopping by.