Generating headlines yet again, electric vehicle (EV) leader Tesla (NASDAQ:TSLA) just announced price cuts to its models for the second time this month, according to Bloomberg. This shot across the bow demonstrates Tesla CEO Elon Musk’s “willingness to sacrifice profitability for demand.” However, fears are erupting both domestically and internationally about a price war impacting EV stocks as a result.
Per the report, Tesla “marked down each version of its Model Y sport utility vehicle by $3,000. It also cut the cost of the base Model 3 by 4.7% to less than $40,000 for the first time in years.” However, the market hasn’t responded well to TSLA stock; shares are down about 1% as of this writing
Earlier this week, Reuters also reminded investors that many analysts expect Tesla’s first-quarter margins to have dipped to a more than three-year low due to the price cuts. Further, Reuters reported that the company has “cut sticker prices on its cars five times between January and April.” Although the decision boosted Q1 sales, analysts expect Tesla’s auto gross margin to print 23.2%. That would be down from the record 32.9% seen a year ago.
Notably, TSLA stock isn’t the only name among EV stocks that’s feeling the heat. As InvestorPlace contributor William White notes, Rivian (NASDAQ:RIVN) recently incurred a price target cut from RBC Capital Markets. RBC has concerns about Rivian’s forward profitability track, a situation that has gotten more difficult with Tesla’s pricing tactics.
EV Stocks Face Pricing Wars Abroad
On a broader level, the main concern for EV stocks centers around individual brand viability. Previously, upstarts could come in with a size or function-compromised EV to attract consumer dollars. However, as marquee brands like Tesla become cheaper and more accessible, the low-cost upstarts may be facing a relevancy crisis. That much has already become evident in the Chinese market.
Once seen as a pillar of China’s economy, EV manufacturers are now engaged in a cutthroat price war, slashing prices or offering cash rebates and other incentives. BYD (OTCMKTS:BYDDY), China’s biggest EV maker, recently “unveiled a second round of markdowns in a month for some of its older models.”
Other sector leaders in the Chinese EV market Nio (NYSE:NIO) and Xpeng (NYSE:XPEV) are suffering steep losses as a result. As of this writing, NIO stock is down nearly 7% while XPEV is down more than 12%.
Slumping auto sales may also reflect deeper problems with the global economy. “The severity of this cycle of price cuts is something that I’ve never seen,” said Sino Auto Insights Managing Director Tu Le, according to The New York Times.
Why It Matters
One glimmer of hope for EV stocks is that, in part because of the wider sales decline, lithium prices have also dropped. Still, that might not be enough to save everyone in the sector. When it comes down to it, only the most resilient companies will likely survive a raging price war of attrition.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
