Tesla's first-quarter shaping up to be 'pretty messy': Analyst

While broader markets rejoice over first-quarter 2024 gains, EV maker Tesla (TSLA) has had a rather dour year so far, the once tech stock favorite falling nearly 30% year-to-date. Pricing competition from Chinese automakers — particularly Xiaomi's (1810.HK) SU7 model — has placed further strain on the demand for Tesla vehicles in international markets.

Oppenheimer Managing Director and Senior Research Analyst Colin Rusch — whose firm remains cautious on Tesla stock — comments on Tesla's seasonal and supply chain weaknesses.

"One of the things that this company has been really great at is making ongoing cost optimization choices, so they have continued to drive costs out of other vehicles on an ongoing basis over a number of years," Rusch tells Yahoo Finance. "We think [if] they continue to do that, they've got some benefits from materials on the lithium side that are still yet to fully roll through. We think they're continuing to beat up their suppliers on components, and they continue to be in the Western world still the largest EV OEM [original equipment manufacturer]."

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Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

SEANA SMITH: Rising war is heating up. Chinese smartphone company Xiaomi is releasing an electric car that's $4,000 cheaper than Tesla's Model 3. While Tesla, a Wall Street darling not so long ago, its fall from grace well is continuing. RBC, Citi, Bernstein, and Oppenheimer all striking a cautious tone on the stock this week. And with the majority of the Street now at a hold rating as one of the worst performers in the S&P 500 for the first quarter, how should you, the investor, be looking at Tesla?

Here to break it all down, we want to bring in Colin Rusch, Oppenheimer managing director and senior research analyst here. Colin, it's good to see you. So just a reaction to, obviously, this downward move that we've seen in Tesla, not exactly a massive surprise given the trends that we had seen over the last several weeks. But how is Tesla set up now not only in the current quarter but looking ahead to the remainder of the year?

COLIN RUSCH: Yeah, so this first quarter is setting up to be pretty messy. I think everyone understands that there's seasonal weakness here in the first quarter. They've had some supply chain disruptions in the European supply chain with the Red Sea. They also had this fire in Germany, you know, that shut down the factory for a little bit, and the announcement that they're kind of trimming some of the production in China.

And so I don't think anyone has any big expectations for production here. But what is at stake, I think, is where the margins shake out for the quarter and how that sets up for the balance of the year. And so as we're looking at this, we just trim numbers on the first quarter just out a bit of caution. But we're also seeing them recognize a certain amount of deferred revenue with the release of the version 12.3 on the FSD, we think they're going to recognize a reasonable amount of revenue there to support the margins.

And so net where we're at is we think there's a bit of a, you know, better than fewer trade setting up here on the quarter provided the margins hold up as we get into the balance of the year. The bigger question really is where are the normalized margins going forward?

BRAD SMITH: Right. And so with that in mind, it all comes back to some of these pricing dynamics and how that correlates within the mechanisms that Tesla is actually able to demand or generate demand here at this point too. As you think about some of the other adjustments that they're going to need to make, are they going to need to make other production adjustments given the demand environment here too?

COLIN RUSCH: I mean, one of the things that this company has been really great at is making ongoing cost optimization choices. And so they've continued to drive cost out of the vehicles on an ongoing basis over a number of years. And so we think they continue to do that. They've got some benefits from materials on the lithium side that are still yet to fully roll through.

We think they're continuing to beat up their suppliers on components. And then they continue to be in the Western world still the largest, the EV OEM. The question for me right now around where they're selling is, how much they're going to sell into the Chinese market where there is this very aggressive price war? And how much are they going to start shipping a number of those vehicles into other countries in Asia and a number of the other underserved countries that they really have not been selling into but do have a sales footprint?