Cutting prices is generally a signal that a company is bowing to competition or, at best, sacrificing current cash flow in order to grab market share down the road. And then there’s Tesla Inc (NASDAQ:TSLA), where Elon Musk’s inherent reality distortion field flips the normal logic and turns what would otherwise be ominous margin pressure into confirmation that everything is right as rain.
TSLA stock currently lives and dies on its luxury car sales, so discounting the lower-end of the Model S series by $2,000 to $5,000 can cut into next quarter’s top line by as much as $125 million.
With the waiting list still running months behind deliveries, I don’t see this as a brute attempt to sell a few more electric sedans to potential customers who were on the fence — Tesla has all the orders it can handle, and if you balk at a $74,000 car you’ll probably keep balking at $69,000.
Good News for TSLA Stock?
What’s really going on is an exponential increase in TSLA’s production capacity. As the Nevada “giga factory” ramps up, capacity is on track to triple this year and double in 2018, so now is the time to start translating its market capitalization into real wheels on the road.
After all, the moment is coming fast when Musk is going to have more cars than ever rolling off the line. He needs to shift the sales profile down toward the mass market, and this is part of that evolution. The really high end of the Tesla universe is actually getting more expensive because those cars are status symbols — someone who is paying $90,000 to $135,000 isn’t really going to get sticker shock if it means an even more luxurious experience.
In the end, I expect the math will even out. And when it comes to the bottom line, Tesla stock may not be sacrificing much on the margins in order to move those additional cars. The lithium battery was always the big cost center behind all the space-age bells and whistles. With the giga-factory starting to achieve efficiencies of scale, Musk may be paying less than $10,000 for his “low-end” battery backs in a few months.
If anything, he may be passing just about all of the savings on as an incentive for people to buy the cheapest Tesla models, but when you get up to the 90D and beyond, his margins are actually expanding. Those “discounted” models earn shareholders a little more on every single sale. As volume increases, so does profitability.
And every month that giga-factory keeps scaling, unit costs drop toward the point where TSLA stock can compete head-to-head with over a century of industrial combustion and reach the mass market without losing money. Tinkering with the pricing shows that the company is still on course — the breakthrough moment may move back a few days or weeks, but next summer should be Musk’s chance to change the world.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.