Tesla (NASDAQ:TSLA)
According to several reports released on Monday, Tesla (NASDAQ:TSLA) is unlikely to be finished discounting its automobiles in 2023, which would further reduce margins.
On Friday, the manufacturer slashed pricing on all US models by at least $1,000 for the Model 3 and Model Y and $5,000 for the Model S and Model X. Toni Sacconaghi, an analyst at Bernstein, said the price reduction was predictable given the high levels of inventory, “but the timing and details (early in the quarter; in the US price; including the Model Y)” surprised him.
He reassured customers, “We believe additional price cuts in other geographies are likely.” Since Model 3 SR discounts are dropping $3750 on 4/18 and competition is heating up, “the fact that Tesla is cutting the price on its longest lead time model suggests other price cuts are likely to follow.” Don’t be fooled: Tesla is sacrificing profit margins in exchange for increased sales volume with these price decreases.
Therefore, he does not see a bottom in margins shortly and believes that Tesla’s efforts would “undermine industry profitability.” Despite Tesla’s price savings, “incumbents are deep-pocketed and not likely to back down,” Sacconaghi said of the car industry.
It’s true, he said, that many believe Tesla’s recent price reduction is indicative of a fundamental cost advantage that will allow the company to squeeze competitors, acquire outsize volume, and ultimately dominate the EV industry. We conclude that “it is extremely challenging for any OEM to sustain an ongoing competitive cost advantage in today’s hyper-competitive automotive market.”
Tesla stock was given an Underperform rating by Sacconaghi, with a $150 price objective.
Meanwhile, Colin Langan of Wells Fargo has maintained a Hold recommendation on the stock because he anticipates further margin pressure. He predicted Q1 margins of 17%, which was below the market estimate of 20% expansion.
Even if “record Q1 deliveries” were achieved because of the price decrease, “TSLA needs higher deliveries to hit its 2M target,” as Langan put it. Without a substantial update, this suggests more price reductions are possible. There is now more competition in China, and inventory levels of several models from the EU were allegedly cut during the second quarter.
On Monday, Tesla stock dropped 3.5%.
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