Could Price Cuts Actually Be a Genius Move for Tesla?

Could Price Cuts Actually Be a Genius Move for Tesla?

Tesla Charging

  • Tesla’s price cuts will reduce margins — but Tesla’s margins are far higher than the industry norm.
  • Lower sticker prices on the most popular models make them eligible for new federal tax credits.
  • Reduced MSRPs will help drive demand against newer competitors, protecting market share.

Tesla is cutting prices on its most popular models. What does this mean for the company and its shareholders?

Tesla‘s (TSLA 7.74%) stock price has bounced back somewhat from its recent lows, but was recently battered after the automaker cut prices of its most popular models, the Model Y and Model 3.

Price cuts continue

It started late last year, with the carmaker offering $7,500 incentives to Model 3 sedan and Model Y SUV purchasers in a move to lower inventory. The company then took things a step further by giving buyers of any Tesla delivered in the final three days of 2022 three months of the Full Self-Driving option for free.

In China, an incentive of as much as 10,000 Chinese yuan was extended, and for the second time in less than three months, prices were cut by as much as 13.5%.

Now comes word that Tesla cut the Model Y’s price in the United States to $52,990, a reduction of about 20%, and the Model 3’s price was reduced to $53,990, a 14% discount.

Tesla has reduced pricing in Europe as well, with the Model 3 and Model Y costing up to 17% less in Germany, and as much as 22% less in Italy. Tesla also cut prices of those models’ prices in Austria, France, the Netherlands, Norway, Switzerland, and the United Kingdom.

And in China, Tesla continues to offer a 6,000 yen subsidy, and is offering a 4,000 yen incentive related to buying insurance through Tesla in November.

What this means for Tesla

Reduced prices bring with them reduced profit margins. But that’s not as bad as it sounds. Tesla’s gross profit margin runs around 25%, giving the company wiggle room to support market share by dropping prices. Most mainstream automakers run closer to those of General Motors, which operates with a profit margin of less than 7%.

In the U.S., the new lower prices will allow more customers to take advantage of the $7,500 federal tax benefits available for electric vehicles (EVs) that cost less than $55,000.

Lower prices will also make these aging models more competitive against an onslaught of new models from other automakers, with some, like the Chevrolet Equinox EV, slated to start at less than $30,000, significantly less than any Tesla. While Chevrolet isn’t a direct Tesla competitor, the arrival of more EV options does mean that Tesla might have to surrender some profit to maintain market share, which last year hovered at 65.4% of the EV market, down from 79.4% two years before.

Certainly, the price cuts appear to be working in China, where local media reports 30,000 vehicles have been sold since the company announced the lower prices. The reduced prices could have the same effect in the U.S., where the company faces few competitors — for now. But that could change; a J.D. Power study recently revealed that 44% of likely EV buyers would consider a Chevrolet EV, 37% a Ford, and 39% a Tesla.

For now, it’s best to hang on to the stock, as it’s starting to rise from its recent lows. But adding to the stock in the short term is not be advisable until its volatility settles down.

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