Tesla is attempting a huge pivot in its strategy at a time when demand for electric vehicles is threatened by a slowing economy and competition is greater than it has ever been. “We’re basically adjusting our pricing to match demand,” Musk said in a Tuesday interview with CNBC. “All car companies make a significant adjustment to price… It’s just that Tesla is so immediate, obvious and transparent (that) it’s not a question of MSRP (manufacturer’s suggested retail price), or models and discounts.” Between January and April, Tesla cut prices at least six times for both its Model 3 and Model Y. Its goal has been to entice consumers to make the leap to its brand with the lower prices. The hope is that enough will do that the volume sold will offset the lower profit it makes on each vehicle. Time will tell if this strategy will work for Tesla, the dominant electric car player. What is clearer right now is that the shift in strategy weighs on Tesla’s stock. Although its shares are up more than 46% since the start of 2023, the stock traded lower after it reported earnings. Since then, it has decreased by 2.3 percent. “While we expect the 1x costs to increase gross profit margin in the second quarter, we fear that the medium-term trend may be to further lower GPM (gross profit margin) as the company noted its willingness to lower prices and accept lower GPM to broaden adoption of TSLA cars and sell FSD (full self-driving) and other services,” Truist said in an April 21 note, in which the company downgraded Tesla stock to hold from buy. In part, Tesla’s success will depend on how much demand there is for electric cars. S & P Global predicts that a mix of battery electric vehicles, plug-in hybrid electric vehicles and fuel cell electric vehicles will make up about 47% of the cars on the road in the US by 2030. But in the near term, electric car demand is being squeezed by the peak of an energy crisis in Europe, adjustments to China’s electric car subsidies, high inflation and concerns about a potential recession in the US. Analysts have warned that Tesla may go too far with the price cuts, and many lowered both their ratings and price targets as a result. These analysts expect stocks to remain under pressure until investors have more clarity on what the situation will look like. “As we wrote in our 1Q23 Tesla earnings note, we expect further price cuts throughout the year, and significant further price cuts beyond our forecast are a risk,” Goldman Sachs analyst Mark Delaney said in a research note published on May 14. Nevertheless, the market is growing. The International Energy Association expects 14 million electric vehicles to be sold globally by 2023. About 13% of those would be Teslas, if the company hits its 1.8 million vehicle production goal and sells everything it produces. Finding an “irresistible” price Tesla’s price cuts are an attempt to take advantage of the growing market. The company is focused on widespread use of vehicles and needs to find an appropriate selling price for its best sellers – Model 3 and Model Y. “Most companies, let’s say a traditional manufacturer, would try to maximize profits, which is neither maximizing ASPs ( average selling price) or to maximize units,” said Will Stein, senior analyst at Truist. “(The balance) is understanding the trade-off between the two and understanding that at some point, as you continue to lower prices, you may not stimulate much more demand.” Tesla’s gross margin before accounting for EV tax credits was 22.6% for the quarter ended December 31, 2022. In March 2023, the gross margin fell to 19%, down nearly 16% quarter-over-quarter. Consensus estimates from analysts polled by FactSet expect gross margin to continue to decline, with a forecast of 16.7% for the quarter ending in June. “The bull/bear debate at its core is: When will the price cuts end for Tesla and what will margins look like on the other side of this cycle as we move through 2023 in a choppy macro?” Dan Ives, senior equity research analyst at Wedbush wrote in a Thursday note. The price cuts did not deter investors at first. From January to April of this year, Tesla shares rose 68%, a stunning surge that helped the company recover from its 65% overall loss in 2022. In April, however, as investors digested the company’s quarterly results and commented on further margin tightening, Tesla shares fell almost 15%. “The data suggests that demand is not being sustained to the level that Tesla would like at current prices,” said Philippe Houchois, managing director of automotive research at Jefferies. For now, Tesla may be willing to lower prices until it finds a selling point that is truly “irresistible” to customers, he added. There’s another question, according to Cox Automotive executive analyst Michelle Krebbs, “… How do you actually measure demand?” She explained that Tesla sales data is more difficult to obtain because customers buy directly from the company as opposed to a dealer. Tesla does not openly disclose how many vehicles it sells. Instead, it refers to deliveries — a number that doesn’t indicate the region the cars are going to or the specific model being sold. In the company’s latest quarterly earnings report, Tesla said it delivered 422,875 cars. That’s shy of the 432,000 vehicles analysts expected, according to FactSet. Despite the shortfall, Musk reiterated his goal of 1.8 million total deliveries this year. “We have real-time demand information, so we know how many people placed an order for a Tesla yesterday,” Musk told CNBC on Tuesday. “Literally every day we get an automated email to the executive saying how many people placed an order, in which countries, (and) for which cars.” Musk did not expand on where the demand is today. If Tesla is lowering and raising prices to adequately match demand, then the continued price cuts are perhaps the clearest — and loudest — signal that demand isn’t where the company wants it. “You don’t want to overreact to these things, because sometimes you get little dips for reasons that are hard to explain,” he said of fluctuations he sees. Tesla vs. Ford There are also wider implications. “Tesla’s price cuts signal that legacy automakers will eventually have to lower their EV prices to levels not much higher than comparable internal combustion engines,” said Seth Goldstein, equity strategist at Morningstar. “While the high-end luxury cars will still command higher prices, the entry-level luxury and affordable segments will need to be priced more comparable to internal combustion engines to attract consumers.” Rivals are already responding to Tesla’s strategy. Take Ford. It has reduced the price of its Mustang Mach-E EV on several occasions. The latest cut on May 2 reduced its sticker by about $1,000 to $4,000, putting the price in the $42,995 to $59,995 range. Tesla raised the price of both its Model 3 and Model Y on the same day by roughly $250. With this change, the Model 3 now sells for $40,240 and the Model Y costs around $47,240 in the U.S. Ford’s price cuts aren’t helping its situation. It operates at a margin of 8% in its EV segment. Ford has fallen slightly since the start of the year, largely due to the burden of its electric car investments. The automaker invests billions in the development and production of electric cars, while losing money on every electric car it produces. “We’ve written extensively about the toll EVs have on legacy (OEM) margins and the impact of EV price deflation. We believe Ford (and other legacy OEMs) will continue to evaluate their EV plans and that F’s governance. see the value in the capital not spent,” Morgan Stanley equity analyst Adam Jonas said in a note about Ford on May 2. Still, legacy automakers have no choice. Goldman Sachs expects electric cars to make up 12% of total sales in year, then climbing to 17% in 2025 and 50% in 2035. Krebbs said the price situation may not have a broad impact. “I don’t see this as an all-out price war. I see it as price war skirmishes against top competitors, because Tesla doesn’t compete in every segment,” Krebbs said. She added that the price cuts are an attempt by Tesla to maintain market dominance and fend off competition from big rivals like Ford. “Ford’s Mustang Mach-E is in Tesla’s bullseye,” she said. Chief Executive Jim Farley has warned that Ford will only go so far in cutting prices to keep up with Tesla. He argued that demand remained strong when he spoke to investors at the company’s latest quarterly earnings call. earnings call. “…We feel a lot of demand (for the Mustang Mach-E) or we wouldn’t be doubling production this year,” he said. A more crowded market Tesla has lost market share as a flood of new electric cars has hit the market, according to S & P Global In 2021, a wide range of automakers — which include Volvo, Cadillac, Mercedes and BMW — had no EV brands registered in the U.S. A year later, 10,390 EVs from a wide range of manufacturers were registered. Tom Libby, S&P global head of industry analysis, told Citigroup on Wednesday that the number of electric car models will grow from 74 in the US to 113 by 2024 and to 151 by 2025. The rise of new models for new consumers to the EV segment. Longer term, Tesla’s price fluctuations could do more harm than good if they end up turning off consumers. “In the next few months, (if) Tesla continues to lower prices (and) lower prices, the buyer will be a little annoyed that they paid a price, now it costs less,” Stein said. “I don’t know yet if it’s a big problem, but I think it’s a more common problem with this pricing strategy.” Krebbs agreed, adding that EV “pricing is as confusing as the price of airline tickets, which are constantly changing,” which can “check off buyers who bought a Tesla at one price and it drops shortly thereafter.” TSLA YTD mountain The electric vehicle maker’s shares are higher year-to-date despite pressure for lower margins and higher vehicle production. The constant price change is likely to continue to be a headwind for Tesla stock, something Musk has not hidden from investors, according to Houchois. “The loudest reaction I’ve heard is, ‘I wonder if he (Musk) is just setting expectations low,’ because this doesn’t sound good,” Stein said. “I hope he sets a low bar.”
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