Tesla Motors Inc (TSLA) is looking to hit its 25% gross margin target as the company continues to extend its competitive advantage by solving the driving range and battery cost issues with electric vehicles, as well as by introducing a smaller, more affordable Generation 3 vehicle, says Dan Galves, Vice President at Deutsche Bank Securities Inc.
“There are a lot of inherent advantages in electric vehicles. I’ll give you a couple of examples: lower fueling cost per mile, lower maintenance cost, better acceleration, better handling,” Galves said. “We see those inherent advantages in EVs, but clearly you need to solve the driving range and the battery cost issues, and we think Tesla‘s current vehicle has already largely solved the range problem, providing 200-plus miles in an essentially no-compromises car, and if you need to drive farther than that, Tesla is quickly building out a network of exclusive fast-charging stations that we think will extend their competitive advantage.”
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Galves expects Tesla‘s next EV, the Generation 3 vehicle, to fully close the gap to internal combustion cars. Based on his positive outlook of the more affordable Gen 3, Galves is expecting Tesla to hit its target gross margin this year.
“I think getting comfortable that these vehicles are very high-quality, and that we expect the margins to continue to improve throughout the course of this year; we think Tesla will hit their 25% gross margin target, or at least very close to that. That plus our belief that they can offer a smaller vehicle — Gen 3 — at a much lower price to drive a more affordable electric vehicle is what made us feel comfortable enough to upgrade the stock,” Galves said.
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