Tesla Keeps Cutting Prices; Should Investors be Worried?

Tesla Keeps Cutting Prices; Should Investors be Worried?

  • Tesla has reduced the price of the Model Y crossover just four months after deliveries started.
  • The EV maker has cut Model 3 prices in the U.S. and China in the past few months.
  • The price cuts threaten Tesla’s higher-than-average gross margins if not accompanied by improved efficiency.

Tesla has formed a habit of cutting prices of its cars nearly every other month. In the last four months, the electric carmaker has reduced the prices of both the Model 3 and the Model Y at least four times.

This week, Tesla lowered the price of the Model Y by $3,000. The crossover has been in the market for barely four months.

In May, Tesla reduced the price of its most affordable sedan, the Model 3, by $2,000 in the U.S.

Tesla cuts prices in China

In the same month, Tesla cut the price of the long-range Model 3 by nearly $3,000 in China. A month before, the electric carmaker had reduced the costs of the standard range Model 3 to qualify for Chinese government subsidies. The cuts saw Tesla deliver a record 11,095 made-in-China Model 3 sedans.

While price reductions could signal improved efficiency, they could be a pointer to problems. Here are three things Tesla investors should be concerned about.

1. Lower gross margins

During the first quarter, Tesla reported gross margins of 25.5%. This was more than double the average gross margin in the industry. Currently, the auto and truck industry’s average gross margin stands at 10.49%, according to New York University’s Stern School of Business.

Tesla enjoys gross margins that are more than double the industry average. | Source: NYU Stern School of Business

With the price cuts, Tesla’s gross margins could take a hit and erode consecutive quarters of profitability. That’s an unfortunate scenario for investors hoping that Tesla’s induction into the S&P 500 index will bring in more institutional investors.

Tesla investors are hopeful that the electric carmaker gets admitted into the S&P 500 index. | Source: @Ladas/Twitter

2. Competition has its sights on Tesla

The price cuts could be signaling that Tesla’s technological edge is over or is close to being overtaken by competitors. Already, legacy carmakers with more resources dedicated to research and development are launching electric versions of their popular brands.

In Europe, for instance, competition is getting stiff ahead of the EU’s strict carbon emission rules. Ford and Volkswagen are among the manufacturers giving Tesla a run for its money.

Volkswagen’s Audi e-Tron has proved popular in Europe. Starting July 20, the German auto giant will add the ID.3 hatchback, which boasts a range of up to 340 miles.

Established carmakers are taking the fight to Tesla and other EV startups. | Source: @TeslaShuttle/Twitter

With growing competition, Tesla now has to compete on price. This should be a real worry for those investors who see Tesla as a tech company rather than a carmaker.

3. Tesla is unwittingly telling buyers to hold out

At least four price cuts since April suggest an average price reduction every month. The danger here is that some would-be buyers might decide to delay their purchases on expectations that prices are heading even lower.

That may or may not be the case, but no rational consumer wants to buy a discretionary product today when they could get it soon at a lower price.

Additionally, the price cuts could have unintended consequences. They’re useful if they increase sales, but they could cannibalize sales too.

In the case of the Model Y price cuts, for instance, Model 3 sales could be cannibalized. The prices of the sedan and the crossover are now closer to each other than ever.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.

Last modified: July 14, 2020 5:12 PM UTC

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