BCA Research Upgrades Auto & Components Sector

BCA Research upgraded its view on the Auto & Components sector from underweight to overweight this week, citing a strong recovery led by Tesla's unexpected Q3 performance.

Tesla, which dominates the sector by accounting for 80% of its market capitalization, has reignited investor confidence, driving the sector's improved outlook.

> "Tesla never fails to surprise investors," BCA noted, pointing to the electric vehicle maker's 22% stock surge following its Q3 results, which reversed all of October's losses.

This marks a major shift after four consecutive quarters of disappointment amid weaker demand and rising competition from Chinese EV manufacturers.

Tesla's Q3 earnings provided multiple bright spots:
– Earnings rose 9% year-over-year, defying expectations of an 11% decline.
– Sales missed estimates by 1%, but BCA sees this as a minor setback, stating, "Sales will rebound further in 2025."
– Margins improved, with Tesla's CFO Vaibhav Taneja noting, "Our operating expenses declined quarter over quarter and on a year-on-year basis."

Future Outlook

Looking ahead, Tesla targets 20-30% growth in deliveries by 2025, introducing new products like economy EVs in Q1-25 and robotaxis by Q2-25. Production of the long-awaited Cybertruck is also accelerating, turning it into a profitable venture.

BCA explained that Tesla's capital expenditure is another area of strength, with $3.5 billion spent in Q3, largely for AI compute investments.

BCA emphasizes that Tesla's turnaround has significant market implications. "Tesla's price is still 30% below its peak, and the stock is likely to outperform the market as long as the economy avoids a recession," they noted.

BCA concludes, "We will overweight the industry on a tactical investment horizon."