4 Potential Sources Of Profit Advantage For Tesla

Disruptive companies tend to command superior profits to their peers due to business model efficiencies, strong brand and differentiated product offerings. Tesla Inc TSLA seems to have similar “sources of potential advantage,” which could result in a profit advantage of 800–1,300 basis points versus traditional auto OEMs, Bernstein’s Toni Sacconaghi said in report.

Sacconaghi reiterates a Market-Perform rating on Tesla, with a price target of $250.

Sources Of Competitive Advantage

The analyst mentioned four potential sources of profit advantage for Tesla:

1. Brand and advertising efficiency — Tesla hardly spends anything on advertising versus traditional OEMs. At 4 percent of revenues, this translates to an advantage of 300 bps.
2. Vertical integration in selling — Tesla’s potential to capture dealer profits gives an advantage of 200–600 bps.
3. Distribution efficiency — Tesla has limited new car inventory and small sales offices, which gives the company a 200-bps advantage.
4. Customer intimacy — The advantage from Tesla's ability to upsell and directly connect with its customers is estimated at 100+ bps.

“Importantly, while we believe Tesla has leading battery costs today, it is unclear that battery cost will be a sustainable advantage over time; additionally, we do not believe that manufacturing vertical integration is necessarily a longer-term advantage,” Sacconaghi wrote. He added that execution is very important and that any issue with Model 3 could impact Tesla’s brand.

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