By Michael Elkins
Morgan Stanley reiterated an Outperform rating and $220.00 price target on Tesla (NASDAQ:TSLA) as the electric vehicle giant's recent price cuts usher in, what MS analysts call the "Great EV Deflation."
The analysts noted, in recent days, they have asked several dealers and automotive experts if they've ever seen a car company cut prices by 13% to 20% across the vast majority of its product range in one move. Nobody can think of a precedent.
Some clients feel that Tesla's move to cut prices has upset customers who recently paid far higher prices for the exact same car. However, 110 years ago, Henry Ford introduced the Model T and re-invented mass manufacturing. Auto prices declined sharply following the event.
The Model T entry-level 'Runabout' cost $825 in 1909 (around $24k/unit in today's dollars) or less than 1/3 the price of the average car at the time. But higher volumes and the moving assembly line brought far greater deflation in the price of the automobile from there. By 1925, the average price of a Model T Runabout was $260 which was around 1/20th of the average inflation-adjusted price of a car in 1907.
Deflation transformed the automotive competitive landscape and drove out much of the industry. In 1907, there were 255 carmakers in the US. By 1929, there were 44 surviving automobile manufacturers in the United States with 80% of sales accounted for by General Motors (NYSE:GM), Ford (NYSE:F), and Chrysler.
Nothing equal to the innovation that Henry Ford brought to manufacturing has happened yet in the EV world.
The analysts continued, "While it's still early days following the Tesla price cuts, we believe history will reflect upon this time as the moment when changes in design, manufacturing technology, and scale enabled profound deflation in the price of EVs. Potential changes to industry composition and market share may take years to play out. But we believe the EV forecasts and manufacturing plans of competing EV players (startup and legacy) may potentially need to be fundamentally reconceived."
Shares of TSLA are up 8.55% in mid-day trading on Friday.