Tesla cut prices across its line-up in the US and major European markets in the carmaker’s latest effort to stoke demand after several quarters of disappointing deliveries.
The company lowered the cost of the cheapest Model Y by 20 per cent and lopped as much as $21,000 off its most expensive vehicles in its home market. Tesla also made major reductions in countries including Germany, the UK and France a week after its second round of cuts in China since October.
The drastic changes reflect the conundrum Tesla faces after having come up well short of its target for annual vehicle deliveries, despite year-end discounts and incentives that chief executive Elon Musk swore off in the past. To continue growing and fully utilise plants that it has opened or expanded in the last year, Tesla may be forced to compromise on the profit margins that Wall Street celebrated when the company was production constrained.
“There will be a significant impact to TSLA’s near-term gross margin, and the math depends on how long these new price levels last,” Chris McNally, an Evercore ISI analyst with the equivalent of a hold rating on the stock, wrote to clients Friday. Even if the cuts apply to just a portion of the year and Tesla partially reverses them, 2023 earnings per share could end up 30 per cent to 40 per cent below the current consensus, he estimates.
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Tesla’s stock fell 3.9 per cent ahead of New York trading. Shares of other automakers including Ford and Rivian also slumped.
The changes in the US drop the price of Model 3 sedans and certain Model Y sport utility vehicles below the caps required to qualify for up to $7,500 in electric vehicle tax credits.
The US treasury department and Internal Revenue Service released guidelines late last year that irritated Mr Musk because the Model Y didn’t weigh enough to be deemed an SUV. That means five-seat versions of the vehicle are subject to the $55,000 price cap that applies to sedans, rather than the $80,000 limit for SUVs.
Toni Sacconaghi, a Bernstein analyst with the equivalent of a sell rating on Tesla shares, wrote last week that the carmaker was facing “a significant demand problem and that its challenges would persist in part because its models were too expensive to qualify for tax credits”.
“We believe Tesla will need to either reduce its growth targets (and run its factories below capacity) or sustain and potentially increase recent price cuts globally, pressuring margins,” Mr Sacconaghi wrote in a January 2nd report. “We see demand problems remaining until Tesla is able to introduce a lower-priced offering in volume, which may only be in 2025.” – Bloomberg
