Tesla bull Gary Black is confident that the massive price cuts of up to 20% for some models will not impact the status and long-term valuation of the electric vehicle manufacturer.
Black, managing partner at Future Fund, said the cuts Tesla (TSLA) CEO Elon Musk made "seem to be positively impacting sales " as the billionaire tries to increase growth as sales figures fell.
The number of weekly registrations for Tesla vehicles in China rose to 12,654 for the week of Jan. 9 to Jan. 15 from the prior week's 2,110, Black said.
Registrations are a metric that analysts use to track the number of cars that are delivered and registered from buyers.
"Tesla is still the cool car and clearly the number one car with 60% market share of EVs in the U.S. and under 20% globally," he said. "It is still the most desired car to electric vehicle buyers."
Price Cuts Were Needed
Tesla missed its 2022 delivery target and Musk sharply cut the prices of its two flagship models: the entry-level Model 3 sedan and the Model Y SUV, which constitute 95% of its 2022 deliveries.
The drop in prices range from 7% to 20% and there are two models eligible to benefit from the new U.S. federal tax credit of $7,500.
The price cuts were necessary even though they will impact profit margins in the short-term, Black said.
"They had to do something.to get volume growth," he said. "It's hard to say whether they were too much. They needed to do it.”
The retail prices now start at $43,990 for the Model 3 rear-wheel drive and $53,990 for the Model 3 Performance, according to the company's website.
All Model Y configurations will now be eligible for the tax credit, which wasn't the case before the price cut.
To qualify for the federal tax credit, cars, sedans and wagons must have a retail price of no more than $55,000. SUVs, on the other hand, with a retail price of up to $80,000 are entitled to the credit.
"There will be a significant impact to TSLA's near-term gross margin, and the math depends on how long these new prices levels last," warned Evercore ISI analyst Chris McNally in a research note.
By lowering its prices Tesla, however, solves a problem pointed out by Toni Sacconaghi, analyst at Bernstein, in a Jan. 2 note.
"We believe Tesla will need to either reduce its growth targets (and run its factories below capacity) or sustain and potentially increase recent price cuts globally, pressuring margins," he said. "We see demand problems remaining until Tesla is able to introduce a lower-priced offering in volume, which may only be in 2025."
During a Twitter Space in December, Musk said the logic behind the new pricing strategy: margins compressing during a recession allows volume to still grow. Tesla can make up the shortfall by selling software and services like Full Self-Driving, its advanced driver-assistance system.
Earlier in 2022 some buyers waited nine months for a Tesla, but those "days are long gone," said Morgan Stanley analyst Adam Jonas on Jan. 13. He has a price target of $250.
How Tesla's Stock Can Rebound
Tesla consists of 9.2% of Black's Future Fund Active ETF (FFND) as of Jan, 17. The EV maker had a terrible fourth quarter because of Twitter "noise" and the impact of lower production output from its factory in China, he said.
Future Fund ETF, which was launched in August 2021, bought more shares of Tesla last week at $105 a share, but Black did not disclose the number of shares.
Tesla's brand has not "taken a hit" despite concerns that Musk focused solely on Twitter after his $44 billion acquisition in October, he said.
When Teslas's favorability dropped, Musk did not continue tweeting conservative stances, said Black.
"Elon is a smart guy and learned to stop tweeting more conservative views," he said. "You don't want your brand to be impacted by your more right leaning views especially if your customer franchise is over indexed to climate-friendly Democrats. It annoys them."
Musk also agreed to hire a CEO to run Twitter, which is also a positive move, Black said.
Although Musk sold about $40 billion worth of Tesla's stock within the past year including a sale of $3.58 billion in December, Black said he believes the billionaire will refrain from more sales this year.
Musk has indicated he would not sell anymore of his holdings of Tesla until 2024.
"I do believe him," he said. "He put his commitment out there. In the past he never put a date on it ."
Tesla's stock lost 65% last year, but its current level is "close to the bottom," said Black.
Tesla's Megapacks or battery storage units could generate additional profit of $2 billion annually if 5,000 units were sold at $0.50 a share, he said.
The Lathrop, California manufacturing capabilities for the Megapacks came online during the third quarter and are intended to be sold to utilities
Black is raising capital via a private placement opportunity for Future Fund Advisors LLC in part to seed a new Long Short ETF that will have a ticker of FFLS. It will offer downside protection in a growth-driven but choppy market.
"Our goal is to raise $5 million in new capital to accelerate our growth," Black said. "We expect the market to be choppy in 2023 as the Fed pauses and then slowly reduces interest rates. Now seems a good time to invest in growth stocks which are cheap by historic valuation metrics. Meanwhile, actively-managed ETFs are experiencing huge demand because of lower fees, transparency to investors, and tax advantages."
