Tesla must address this question on its path to dominance: Barclays

By Emily Bary

Barclays wonders if Tesla needs more models and trim options to expand its market

Tesla Inc. is set up well to gobble up market share, but Barclays analyst Dan Levy questions how a key strategic choice will play out.

Levy is intrigued by the issue of "model concentration" at Tesla (TSLA), as the carmaker has a far more limited array of configurations compared with its industry rivals.

"We appreciate that Tesla has embodied the global auto push to simplification and complexity reduction," he wrote in a Tuesday note to clients. "Yet with Tesla increasingly facing demand constraints, and with price cuts/discounts required to clear more volume, it begs the question whether Tesla is running into an issue with excess model concentration."

For illustration, Levy notes that Tesla has about 180 different trim configurations for its Model 3, while the BMW 3 Series has roughly 195,000, by his estimates.

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Granted, Tesla has had success with its strategy thus far, as its Model Y was the world's best-selling car for the first quarter, according to one list.

"Tesla's path to volume gains has been a contrast," Levy wrote. "Not only do Tesla's two primary models, Models 3 and Y, hold significant share, but we'd also argue that part of Tesla's margin lead over other OEMs [original equipment manufacturers] reflects a very limited set of trim levels given significant scale benefits."

But while Levy sees room for Tesla to rack up further gains in market share, he also deems that "the path to share gains is getting harder" as the company faces demand challenges and has had to cut prices this year.

Levy explored whether cars are like Apple Inc.'s (AAPL) iPhones in that model configurations become less important because customers have the opportunity to customize their experience through software. He sees "several cases to be made" for the parallel, though he's still not sold.

"Not only are different vehicle types required for different use cases, but vehicles can also be an expression of one's tastes/styles/preferences," he wrote. "Simply, while most people don't mind that many others around them may have the same iPhone or Android, most people don't want the same car as others."

He thinks Tesla may need to add more models and trim options to grow its market, though he also wonders about the margin impact if Tesla moves in this direction. Further, he flagged that Tesla is rumored to be planning a "low-cost, truly mass-market" Model 2 vehicle, but the hypothetical launch of this car "may present an even greater question on concentration" given the potential for limited variations with this model.

Levy has an overweight rating and $220 price target on Tesla shares.

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-Emily Bary

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05-30-23 0933ET

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