Goldman says buy Tesla and stocks with electric-car exposure

The significant pullback in U.S. auto stocks creates an opportunity for investors to own long-term growth names including Tesla Inc. and other companies exposed to electric vehicles, Goldman Sachs said.

Even with gas at about $2 per gallon, the total cost of ownership for electric cars is already competitive with vehicles powered by traditional internal combustion engines in select categories, like mid to high-end cars, analyst Mark Delaney wrote in a note to clients.

“We expect the total cost of ownership for electric vehicles to become increasingly attractive over time as battery prices fall and internal combustion engine cars have added costs to meet emissions requirements," he said.

Goldman’s newly created global autos team expects electric car penetration to rise to nearly 15% by 2030, from 2% in 2019.

Tesla Inc. has a significant lead over other automakers in making electric cars and is expected to maintain a strong market position, Delaney said. The company is helped by its strong brand, vertical integration, and early-mover advantage in an industry with generally long development cycles where it takes about two to four years to roll out new models.

“The Model Y will help Tesla to have more traction in the important SUV and crossover market as the price is lower than the Model X," the analyst said. Delaney initiated coverage on Tesla with a buy rating and a Street high price target of $864.

This vote of confidence comes at a time when Tesla shares are already on a tear, rising nearly 60% over the past seven sessions and climbing another 6.6% in pre-market trading on Wednesday. Shares are now again hovering close to the level at which the company raised cash in mid-February, after dropping to a low of around $360 in March amid the virus-related meltdown. The offering was priced at $767 a share.

Auto supplier Aptiv Plc, which designs and makes the electrical architecture of cars, was also initiated with a buy. Delaney said the company is well positioned to capitalize on the key trends of electric and autonomous cars, given its strong market position in connectors, high voltage harnesses and autonomy.

Overall, Goldman expects 2020 to be a very challenging year for the auto industry due to the significant supply and demand related challenges as a result of Covid-19, and said U.S. light vehicle sales could decline by 30% year over year to 12 million. “We expect a partial recovery in U.S. auto sales in 2021 to 15 million," the analyst wrote.

However, the companies in Goldman’s coverage are significantly better positioned to weather the current downturn than the one in 2008-2009, Delaney said. The analyst also initiated automakers Ford and General Motors with the equivalent of a hold rating, and suppliers Visteon and Gentex with sell.