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Tesla ‘pricing themselves out of the sweet spot of demand,’ analyst says

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Cowen Research analyst Jeff Osborne joins Yahoo Finance's Pras Subramanian and Brian Cheung to discuss Tesla earnings, vehicle demand, price increases, and the outlook for production.

Video Transcript

BRIAN CHEUNG: All right, well, why don't you hang for this conversation, because we want to broaden out to the broad subject of Tesla and the earnings reports that they released yesterday after the bell. For more on that, Jeffrey Osborne, an Analyst at Cowen, joins us now. Jeffrey, great to have you on the program this morning.

We were just talking about the Bitcoin angle of things, but want to broaden out here. You noted that-- first of all, your price target on the stock is about $733. That's essentially not far from where we're at right now. What did you see in the earnings report that tells you we could go sideways from here on the stock?

JEFFREY OSBORNE: [AUDIO OUT] quality beat, as Pras mentioned, we were looking for an over $400 million charge this quarter from the Bitcoin collapse. Unfortunately, that didn't play out and it was about a quarter of that given-- they sold 3/4 of their stake. They also had a pretty dramatic decline in R&D expenses.

But really, the next few quarters are really about ramping up two new factories. They haven't done that since Shanghai ramped up. That'll be the laser-focus moment for investors, as well as there's a bunch of new competitive threats coming out. You see Ford in the news today doubling down on their EV strategy, but also GM this week with a Blazer and you've got the Silverado on deck as well. So quite a bit of new material out there in the EV landscape.

PRAS SUBRAMANIAN: Hey, Jeffrey, what did you think about-- you mentioned the ramp-ups in Berlin and also Giga Austin-- what's your take on the fact that Tesla updated their installed capacity forecast, right, from around 1 million to almost 2 million? You think that's doable? You think that's-- think it's a note, like, kind of like full steam ahead as they push forward through 2022?

JEFFREY OSBORNE: Well, they're always super bullish, as you know. But I think it's going to take a while to get to that full utilization. They gave some breadcrumbs as it relates to weekly production, both in Germany as well as in Texas. That will take some time. But I think by the fourth quarter of next year, you could start hitting that on a run rate basis. But certainly, you would need an additional factory on the cards to be announced in the next six months or so to start hitting the targets for '24 and '25, as you look at future growth for the company, especially if the Cybertruck comes out next year.

PRAS SUBRAMANIAN: Hey, Jeff, do you think that this 2022 production forecast that 50% CAGR, about 1.4 to 1.5 million vehicles delivered this year, is that doable, you think?

JEFFREY OSBORNE: I think it's a stretch. We're just shy of 1.4 on our end. So I was a bit surprised that they reiterated the 50% target. I thought they would come in more like 40%, 45%. They're pretty loosey goosey with the targets in terms of general ranges, typically defined over multiple years. But yeah, that was a bit of a surprise. I thought they would use China as a scapegoat and lower the guide for the year.

BRIAN CHEUNG: Jeffrey, you talked about the Gigafactories already. But just what about the product line itself? You know that there are upside and downside scenarios depending on whether or not Model Y or Model 3 end up cannibalizing sales of each other. Can you kind of detail a little bit more your thinking on that?

JEFFREY OSBORNE: Yeah. I mean, look, they've raised the prices of both vehicles pretty substantially-- well over 25% over the last six to nine months. And so first of all, at a macro level, we're concerned that they're sort of pricing themselves out of the sweet spot of demand-- that $45 to $60,000 range. Certainly, there are well at the higher end of that. And so I think they do need to drive that down.

But unfortunately, the inflation on the batteries is leading to pretty much everybody in the EV landscape having to raise prices. But in terms of the Y cannibalizing the 3, that's been playing out for a while. We do have some concerns that a lot of the China production, typically anywhere from 25% to 40% on a monthly basis, is exported.

And as you start having localized production in Europe, of the Y in particular, I think there'll be less of an appetite to export from China. And so, really, you'll need to see the Chinese embrace the vehicle in earnest. And so the comment about the fiat currency that you had before I came on-- my sense is quite a bit of that is in Chinese currency, but we'll have to see when the 10-Q comes out.

PRAS SUBRAMANIAN: Hey, Jeffrey, I wanted to talk to you a bit more about macro stuff here. Initially in the call, Tesla was sort of talking about a little bit of demand weakness-- sort of noting some demand issues. And then when analysts followed up on it, several times, they said, no, no, no, we have no actual data on that. Demand is fine. It's always been a production supply problem. What was your take on that?

JEFFREY OSBORNE: Well, I think Elon sort of answered your question when he said he only hops on the call when there's negative news. So he needed to manage the message. If it was a great quarter and there was nothing to manage, I don't think he would have been on the call.

But, look, I do think there's some very small cracks in demand. Certainly, the lead times for all electric vehicles right now-- Rivian, Ford, et cetera-- are multiple months, if not multiple quarters. But you can place orders and place a fake order, if you will, and see when you would get a delivery.

And Tesla is still an elongated demand cycle. It's not like there's a bunch of vehicles sitting on the lot. So I think demand is very strong. I'm not sure it's running at a 2 million run rate that they're talking about, especially with the portfolio being a bit stale, in my view. So they need something new to get investors excited, at least institutional investors, that I talked to.

BRIAN CHEUNG: How much of that story is just the competitive landscape as well with all these traditional OEMs ramping up their EV offerings? I mean, you mentioned that progress in full self-driving might be one catalyst for this company going forward-- is that one of the differentiators that's going to make people want to get a Tesla still instead of a GM offering or another OEM offering?

JEFFREY OSBORNE: Absolutely. We would estimate about 20% to 30% of--