2023 is ‘a pivotal year’, Deutsche Bank analyst explains

2023 is ‘a pivotal year’, Deutsche Bank analyst explains

The bulls on Wall Street are still piling up in Tesla stock, citing a host of potential catalysts.

In a note from Friday, Deutsche Bank analyst Emmanuel Rosner said he believes the rally in Tesla stocks is just getting started with several likely drivers for the company in 2023.

“We view 2023 as a pivotal year as Tesla continues to grow volume at a rapid pace, enter new segments with Cybertruck and Semi, optimize its manufacturing footprint and take advantage of IRA [Inflation Reduction Act] which will reduce costs and boost demand,” wrote Rosner. “We see significant scope for an upward revision of 2023 Street estimates based on these factors, with additional gross margin upside potential from being fully self-driving, with each 5% improvement in global take-up rate on new sales increasing gross margin by an additional 80 basis points, which is not in our base case.”

The electric car maker’s share is up more than 40% in the past three months, putting the Nasdaq Composite’s profit of 8% ahead of rivals Ford and GM.

Wall Street owes the push for optimism around new government legislation that will support EV adoption in 2023 and beyond. Tesla’s strong execution in the first two quarters of the year has also improved investor sentiment towards the stock, which suffered a slight blow in August amid a broader market pullback.

Here’s more about Rosner’s call:

Rosner sees margin improvement for Tesla:

The Deutsche Bank analyst expects improved production costs as a key profit driver for Tesla going forward.

“While the improvement in the company’s gross margin has slowed this year due to costs and inefficiencies from Covid-related lockdowns and new factory startups, 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 predict that Tesla could increase gross margin by an additional 300 basis points year over year, driven by a positive mix shift towards lower cost of goods sold manufacturing facilities and benefiting from IRAs. [Inflation Reduction Act] battery production credits in the US”

LAS VEGAS, NEVADA - APRIL 09: A Tesla car drives through a tunnel at Central Station during a media preview of the Las Vegas Convention Center Loop on April 9, 2021 in Las Vegas, Nevada.  The Las Vegas Convention Center Loop is an underground transportation system that is Elon Musk's The Boring Company's first commercial project.  The $52.5 million loop, which includes two one-way tunnels for vehicles 40 feet underground and three passenger stations, takes convention attendees across the 200-acre convention campus in all-electric Tesla vehicles in less than two minutes for free.  To walk that distance it can take up to 25 minutes.  The system is designed to transport 4,400 people per hour with a fleet of 62 vehicles at maximum capacity.  It is scheduled to be fully operational in June, when the facility plans to host its first large-scale convention since the COVID-19 shutdown.  There are plans to extend the system across the entire resort corridor in the future.  (Photo by Ethan Miller/Getty Images)

LAS VEGAS, NEVADA – APRIL 09: A Tesla car drives through a tunnel at Central Station during a media preview of the Las Vegas Convention Center Loop on April 9, 2021 in Las Vegas, Nevada. (Photo by Ethan Miller/Getty Images)

Rosner added: “Assuming a base cost of goods sold/vehicle of $36k in 2021 (before the impact of rising raw materials and inflationary costs that the company is largely offsetting through product price increases), we estimate Tesla would be $2,400 per vehicle. can generate (or 6.5%) average cost reduction from expanding manufacturing footprint to lower cost of regions and facilities sold, and an additional ~$800/vehicle in US battery manufacturing credits in Fremont and Texas, on average on a global basis.”

All in all, he added, “the combined potential cost reduction of $3,200/vehicle could represent a benefit of 5.5% of the average sales price, but we are conservatively increasing gross margins for 2023 by 200 basis points from 29.5% to 31.5%, representing a 300-point improvement from 2022 levels and increasing adjusted EPS from $6.60 to $7.15, significantly above the consensus of $5.82. “

Rosner’s long-term view of Tesla:

Lower costs aren’t Tesla’s only headwinds in 2023 — the company will have new products, too.

Rosner highlighted a potential increase in demand for Tesla’s Cybertruck and Semi-vehicles expected to hit the market in 2023.

“Longer term, we see more room to improve gross margin and even greater potential for operating margins as volume increases,” said Rosner. “We continue to view Tesla as one of the most compelling stories in the auto sector thanks to its pricing power, superior cost structure, strong execution and security of supply and now building more meaningful capacity to support significant growth.”

Brian Sozzi is a great editor and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and further LinkedIn.

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