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Tesla shares hit 7-month high as Model 3 qualifies for EV tax credit

As Tesla shares hit a 7-month high, George Gianarikas, Canaccord Genuity Managing Director, joins Yahoo Finance Live to discuss the recent price cuts, regulatory tailwinds, and increasing competition.

Video transcript

- You're bullish just in terms of what these tax credits-- what it could do for demand. How big of a bump do you think we could potentially see?

GEORGE GIANARIKAS: Look, over the last, call it, five, six months, Tesla has seen some demand issues. They started cutting prices late last year. They enacted six price cuts until recently, where they seem to have stabilized that a little with some marginal, marginal price increases recently.

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And this is happening globally. Whether it's the US, Europe, China, we've seen general demand weakness in auto, and in EVs, and Tesla specifically. It showed up, not so much in their unit numbers last quarter, but in their margins, right. The margins dipped below this magic sort of 20% on the growth side that they had talked about and guided to.

What this tax credit does is it helps not only stabilize them in but potentially increase it over the course of the year, they've guided for 1.8 million vehicles. And I think that most people expect them to sort of hit that. But where it could help them quite a bit is in their margins, because they could get to this target without having to cut prices further. Because frankly, the federal government is helping them do that.

And if you think about what it costs to buy a Model 3 in the United States, they're getting a $7,500 tax credit, if you meet certain income requirements, which makes these comparable in some states-- in some states that offer additional tax credits to a Toyota Camry. So really, the Model 3, with multiple tax credits, is becoming a mass market vehicle, which is just an incredible thing to see. It's around $25,000 if you live in states like California or even Colorado.

- Yeah, you know, George, I was adding up those tax credits today. As somebody who lives in California, it is a huge, huge discount. When you think about it, the Tesla is not the only carmaker, at least in the EV space, that is getting that kind of double credit, right. The federal tax credit as well is whatever the states are offering. How do you think Tesla competes in that environment when things are becoming increasingly crowded in the space?

GEORGE GIANARIKAS: Look, Tesla has a lead in EVs, a very strong lead, particularly on the mass market side, and they could make money at those price levels. I mean, look, we cover a company called Rivian, that's a competitor. But they have a niche product. A very, very good product with a high-end SUV and truck. Those don't qualify for these tax credits, but this is a completely different marketplace.

And the GM's, the Fords, we don't cover them. But at this particular price point, it becomes very hard for them to make money in this $20,000 to $30,000 range for EVs. Tesla can do it. And it's really their ability to have full vertical integration that's allowed them to do that. They make battery cells, they even mine and process materials, they have this autonomous driving software called FSD that can add to margins.

I mean, the way we think about their business, it's razor, razor blade. Meaning that they sell these vehicles at a 20-ish percent gross margin. And they hope to penetrate and get additional high gross margin software sales over time through adding on full self-driving. now, right now, it's priced at $15,000 for that option.

We think it's very, very compelling, but it's getting a lot more expensive particularly relative to the price of the car that seems to be going down in price, either through Tesla's works or through federal tax credits. So we're advocating for a price cut for FSD from $15,000 maybe to the $10,000 range. But that really helps their margins over the long term.

- George, when it talks about the potential here of FSD, there was talk earlier this week. Elon Musk saying that he would be open to licensing the technology. Of course, there was also the partnership with Ford last week, for its charging network. Do you think that's a smart move here, going forward, for Tesla, just in terms of licensing some of the technology that they have already perfected at this point?

GEORGE GIANARIKAS: Look, it could be. We'll have to figure out how that works and what kind of price they offer. We actually initiated today on two companies in autonomous driving. We called our report, "AI for the streets." Because ultimately, these are AI companies, right.

Not only is Tesla an AI company, but a company like Mobileye who initiated on, or Aurora, these are really, really interesting stories that create a product that has a lot of AI embedded in it. So with companies really want to move forward and have strong autonomous offerings, they have a couple options on the passenger side, right.

Today, they could potentially do something with Tesla, we'll see how that works out. They could also use something for Mobileye. And over the long term, maybe even something from Aurora. So they'll have multiple options. But on the passenger vehicle side specifically, we think Tesla is in a very, very strong position, as is Mobileye.

- You talk about the vertical integration that has really been key to Tesla's success, and I'm thinking to-- as a driver, the benefit of having something like a Tesla is the infrastructure that is already in place for those Tesla drivers. As we see more and more offerings within the EV space, how much of that becomes a real advantage to Tesla? I mean, it already has been. But now that we're talking about affordability for the car, to what extent does that become an additional lever, additional reason for drivers to say, look, this is why I'm going with Tesla.

GEORGE GIANARIKAS: That's a great question. So what we've seen so far is that through vertical integration, Tesla has been able to offer vehicles at a low price and still make money on them. But we'll see in the future, and what we're seeing from a company like Rivian, for example, is that what vertical integration does is it allows features to be downloaded over the air.

And it sounds like it's easy, right. We all have it on our smartphones, for example. But in order to enable real over-the-air features, like something Rivian offers called Camp Mode, where it literally changes the suspension of your vehicle, you have to be able to write software at a system level. You have to be able to write the braking software, the motor software, and all this stuff that today, a company like Ford, for example, buys from hundreds of independent vendors.

As a matter of fact, there was a recent interview with Ford CEO where he described this very phenomenon. So these companies have to be built up from the ground, and have to embed a Silicon Valley software-type infrastructure and culture. That's really hard to do when you're re-engineering your company.

And companies like Tesla, and even like Rivian, have done that from the ground up. They started with a clean sheet of paper. And so that kind of DNA allows you to not only to have low prices, but also really great feature sets.

- So does Rivian present the biggest threat to Tesla? I mean, clearly we've established that you're very bullish on Tesla. What is that one carmaker that you think could really offer-- or could present the biggest threat?

GEORGE GIANARIKAS: Don't cover them. But I think that over the long term, and we've written this in our reports, the market will be Tesla and maybe a couple other OEMs on the traditional side. We think Rivian has a very, very good chance. But it's the Chinese OEMs that present a global threat to Tesla's dominance.

And it's the same way the smartphone market has worked out. We have Apple and we have a lot of very successful Chinese vendors-- and maybe Samsung too. And we see the EV market really structuring itself, long-term, in a very similar fashion to the smartphone market.

- Yeah, that's a good analogy right there. George Gianarikas, Canaccord Genuity managing director. It's good to have you on today. I appreciate the time.

GEORGE GIANARIKAS: Thanks for having me.