Tesla's (TSLA) shift away from profit and toward volume is getting a swift reaction from Wall Street. The EV standard bearer is in a phase where "they need to get growth" to absorb the fixed costs they've built up, says Phillippe Houchois, Jefferies Managing Director, speaking with Brad Smith and Julie Hyman on Yahoo Finance Live. Houchois downgraded its shares to Hold from Buy, and dropped the price target to $185 from $230.
Tesla shares slid sharply after first quarter results revealed those tighter margins; the selloff pushing Elon Musk's business below the half-trillion dollar mark. On the earnings call, its billionaire CEO stood his ground, saying the move toward higher volume "is the right choice here versus a lower volume and higher margin." Even with the selloff sparked by first quarter earnings, Tesla is still up year-to-date while retaining some of the healthiest margins in the industry.
Tesla's big push toward cutting prices is an evolution for the brand. Previously they were touted as expensive, "premium cars" Houchois says. Now the electric vehicle maker is "improving affordability" across the industry, but those big slashes cut into margins. Expanding volume will give Tesla "an edge to reduce variable costs," Houchois says. But the automaker will need to "grow 30% to actually absorb" fixed costs. "We just don't know exactly when the trough will be," Houchois says, adding "it's an ongoing process."
Key video moments:
00:00:22 Tesla must grow to close fixed costs
00:00:47 Tesla's mission: make EVs affordable
00:01:04 "We don't know" when the trough will be
