Wells Fargo Equity Analyst Colin Langan and New Street Research Managing Partner Pierre Ferragu join Yahoo Finance Live to discuss Tesla earnings, what’s driving market share for electric vehicle makers, long-term growth, overall demand, and the outlook for a recession.

Video Transcript

JULIE HYMAN: We got to start with the biggie.

BRIAN SOZZI: it on the big board, Julie Hyman. All right, let's focus in on Tesla here. Tesla shares, well, they're losing power this morning after the EV maker posted revenue for the third quarter that missed Wall Street estimates. Tesla CEO Elon Musk addressed a number of hot topics on the earnings call as well, from macroeconomic concerns to his pending deal with Twitter.

As they say in Wall Street research notes, lots to unpack here. I really like what Citi had to say. They posed this question-- does the market want to see bullish Elon Musk back? Because he said a very lot of interesting things on this call last night, ranging from a potential stock buyback, to floating a potential $4 trillion valuation for this company. I know, Brad, what caught your attention-- Musk the latest executive, though, to chime in on Fed policy in this country.

BRAD SMITH: Yeah, and particularly interesting, especially as we've moved through some of the banks that have reported thus far. And, of course, you expect to hear about what their positions, what their takes are on the Fed and where there may be a pivot or shift in the future. But it was interesting to hear this from Elon Musk on the call. We have a clip of that for you.

ELON MUSK: North America is in pretty good health, although the Fed is raising interest rates more than they should, which I think they'll eventually realize that and bring it back down again. So demand is a little harder than would otherwise be.

But as I said earlier, we are extremely confident of a great Q4. And we anticipate continuing to grow our vehicle production sales deliveries by, on average, 50% a year as far into the future as we can see.

BRAD SMITH: So it's always a riveting listening tuning into some of the Tesla earnings calls after the report drops, but particularly what he mentioned around where some of the rate policy would actually, perhaps, dampen demand because of the interest rates also impacting the way that consumers or customers might be able to finance these vehicles in the futures too.

That's another major consideration for a company in Tesla. And that particularly directly correlates with some of the demand or some of the forecasts that they're even talking about here-- 50% a year in terms of production sales deliveries that they're trying to grow towards in the near future.

JULIE HYMAN: Yeah, I mean, he sort of acknowledged maybe a softening in demand, right? But overall, the narrative continues to be at Tesla, demand's fine. Demand's OK. We are not able to get as many cars as we produce into people's hands.

And that really accounts for the gap here that we're seeing that the company is not going to necessarily meet its production and delivery targets for 2022. Deliveries should be 50%. That's the long-term annual target.

They're not going to make that this year, and that was the big news that came out last night. But even in the meantime, because of supply chain issues affecting that, supply chain and delivery issues are also affecting the cars they can make getting to people. Shipping costs are going up, having trouble getting space on ships, for example, that they need. That's what they're talking about.

All of this affecting the automotive gross margin in the quarter-- 27.9%, which is short of estimates. So that's why we're seeing the shares down this morning-- maybe a little bit of feed through and concerns about demand. But the company's line continues to be blaming it on supply chain, blaming it on shipping, et cetera.

BRIAN SOZZI: Another red flag before we bring in our guests here on this one-- a lot of chatter out there in the street this morning about a potential China slowdown over on Tesla. I'm looking at a good note by the Guggenheim team noting potential price cuts on Tesla vehicles-- when have you heard that before-- coming out of China potentially this fourth quarter.

They're calling out rising competition. Look, we've talked to Xpeng, Li Auto, a lot of folks-- there's a lot more EVs players in that key market. And Tesla might be losing market share in its second-most important market.

BRAD SMITH: Yeah. China, of course, and the Shanghai Gigafactory ramping up production, deliveries. They talked about that on the call-- experiencing a reverse recession of sorts, which was interesting to hear, property market related-- property market mostly is what Elon said there. And in Europe, especially with Gigafactory Berlin, they addressed that on the call too.

We've got much more on Tesla here. Let's bring in Wells Fargo Equity Analyst Colin Langan and New Street Research Managing Partner Pierre Ferragu. Great to have you here with us this morning. Colin, first, I want to go to you because you had actually been able to get a question in on the call yesterday, and particularly as we think through full self-driving, some of what Tesla is selling potential buyers on in the future-- do you believe that the demand is going to be able to sustain itself to some of the targets that Tesla is putting forward?

COLIN LANGAN: In terms of full self-driving, I think their timeline is a bit optimistic. I mean, I think particularly when you define full self-driving, and I think on the call the answer to my question, what he described really isn't what most experts would call a level 4 level 5 full self-driving. Someone still has to monitor the vehicle.

That would be an advanced level 2-plus type system, which could be very impressive, but not the definition where you could actually remove the person from the car. I was in San Francisco in the Cruise vehicle-- that's full self-driving. There was no one in the driver's seat and the car was driving itself.

I think that's kind of what he has promised in the past. And so it seems like it'll be falling short of that. And from the experts that I talk to, quite frankly, I don't know without a LIDAR, without all the sensors, it's possible it's going to take, I think, a very, very long time to get to true level 4. So I'm a bit skeptical about what full self-driving really means.

BRIAN SOZZI: Pierre, I'm sure you just heard us talking or highlighting some concerns out of China. What are you seeing in that China market for Tesla? Are they losing market share? And how much might they cut prices this quarter?

PIERRE FERRAGU: So yeah, it's a good question. What's happening in China today is-- the way I would characterize it is that we are entering into a phase of slowing, softening end demand. And of course, everybody in China is adapting to that circumstances.

But you have to keep in mind the context, which is that broadly overall for electric cars in China and everywhere in the world, supply is still below demand. Demand is still exceeding supply. When you see market share movements, most of the time it's just going to be about who is capable of bringing car into the markets.

So what is going to drive market share going forward? And what has been driving market share so far is much more-- and I'm talking about cars that can be compared, not like $15,000 cars with a $50,000 car-- of course, what is going to drive market share is actually supply. How many cars can you produce is going to drive your market share. And that's what has been driving market share so far.

When you look at price cuts, don't necessarily look at it as a reaction to the local market. Think about it more as, for Tesla, a way to manage the delivery of their cars. At the moment, they are shipping those cars outside of China to other markets.

You'll see prices in China holding very high. And if at some point Tesla is producing a lot of cars and needs to get these cars into the hands of drivers fast in the Chinese market, they are going to raise their prices. So these movements are actually very practical.

They are always interpreted as more, like, strategic and long-term reaction to a softening of demand. I think it's a mistake. My experience of Tesla pricing strategy is actually to be very tactical and play on where they want the cars to be delivered.

JULIE HYMAN: So let's play off of that a little bit, Colin. So do you think there are any longer term implications of what we heard from Tesla in terms of the overall demand picture?

COLIN LANGAN: I do think as we go into next year, demand's just going to be mathematically tough to do. So if you go back historically and you look at the best selling ever sedan, best selling ever SUV, it's the RAV4 and the Corolla back in 2019-- both happened to be the same year. They sold 2.3 million units.

The 50% KAGER would put you at 2 million units which would be needed-- almost all would be Model 3 and Model Y. It would probably be almost twice-- not quite twice the price point of those vehicles. So that's a very, very high threshold at the price point we're talking about.

So I do think something has to happen into next year. I think Q4 is probably OK. I mean, they already have orders. They're going to deliver those orders. They've taken good pricing on those orders.

I think as you get into next year and you have this very high target and a very high price point, I think something's going to have to give. I don't know that that's even special to Tesla, to be honest with you. I think the whole industry is going to have pricing issues. But I do think those are some concerns as they go into next year.

BRAD SMITH: Pierre, on the call they were talking about, and Elon specifically was talking about China, was talking about Europe, and the US, and all of those with regard to where they may sit within a recession, going into one or staring down one in the future-- or actually actively in one. And so from your perspective, how much might that actually impact some of the demand that Tesla is hoping to lock in?

PIERRE FERRAGU: Yeah. It's a very good question, Brad. Look at it from two separate angles. One is a secular angle, one is a cyclical angle. On the secular angle, as I said, everything indicates there is more demand for electric cars than there is supply. It's probably going to remain so the same way.

I know it's kind of disturbing-- if you look at the industry, the car industry in your area, you've never seen cars that have the success of the Tesla cars. But look at these cars-- they sell for 30% gross margins. They've gone through an exceptional, unprecedented ramp in terms of manufacturing. And they've been accepted in the market that way.

So they are probably going to blow away the kind of demand that's been bimodal in the history of the industry. That being said, next year, you have interest rates going up. You have an economic slowdown. Buying a car is a big deal.

And it's very easy for consumers to enter into a mood of postponing the acquisition of a car, because interest rates are too high, because the economic environment is not good because the job is at risk. So if there is an economic slowdown, Tesla is going to be hurt exactly the same way as other car manufacturers.

And as Colin mentioned, the first impact, really, is pricing. Because when you're manufacturing cars, you need to get rid of them, get out of your factory, you need to sell that. So the first thing car manufacturers will do in an economic slowdown is lowering prices. Everybody will do that.

It's going to be very painful for everybody. Of course, Tesla, with 30% gross margins, has a lot of room to maneuver to lower their prices. That's the reason why the team, Zach and Elon, yesterday said, we can go very, very, very deep before we burn our money, before we start thinking of slowing our expansion plans.

So they're not worried about a recession not because they are not worried about demand-- they see demand is at risk next year. But if demand is at risk next year, they're going to get prices, they are going to keep growing as a business, and they're going to do fine. So P&L might look very, very bad and very, very challenged, no doubt about it. But the trajectory of this, I think, is not at risk.

BRIAN SOZZI: Colin, we have to ask you this, because we get questions like this on Twitter. You know, Musk floating out there a potential $4 trillion valuation. Some would say he's joking around, but still, it's a number that he put out there yesterday.

Is there anything in your modeling, when you think about the next 10 to 15 years for this company, that that might be the valuation they can get to?

COLIN LANGAN: I mean, that seems quite a bit of a stretch. I think his comments even said there's a narrow path to that. You have to give them full credit for all of these factors that I consider more like long-term optionality issues-- things like whether you could get true level 4 full self-driving, whether there's actually some value in the Optimus spot, and Dojo, and these sort of future projects. I think from a pure automaker side, that's going to be extremely difficult to do.

JULIE HYMAN: And, Colin, just quickly here, Musk talking about that the company board thinks it generally a good idea to buy back stock. There's also the specter of him potentially personally selling more stock to continue to fund his Twitter purchase. Do you think one or both of those things does end up happening?

COLIN LANGAN: I think it's almost very likely that both will happen. I mean, he did say that the board was in support of the $5 to $10 billion. So I feel like that's almost a soft announcement of the buyback.

That would still only be 1% of the market cap, so it's still fairly small despite the size. And I think from the stock sale-- and the math is, I think the original deal was that he had $21 billion of financial commitments with equity partners. I think the margin loan, from my understanding, of $12.5 is gone.

So there could be up to $33.5 of total equity commitments needed between him and whatever equity partners he has. $15 billion of stock has been sold. So there's still multiples billions of potential of stock that he might need to sell in order to close the Twitter deal.

JULIE HYMAN: All right, we'll be on the lookout for both of those announcements potentially. Thanks guys, appreciate it. Collin Langan of Wells Fargo and Pierre Ferragu of New Street Research-- thanks to you both. Appreciate it.