Price Cuts Will Not Save the Day for Tesla Stock


  • Based on Tesla’s (TSLA) recent stock price performance, the market is confident that its vehicle price reduction gambit will pay off.
  • Drilling into the details, it’s questionable whether the EV maker can slash prices, and maintain its current level of profitability.
  • Worse yet, these price cuts may only have a temporary effect on demand.
TSLA Stock - Price Cuts Will Not Save the Day for Tesla Stock

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While starting to pull back, Tesla (NASDAQ:TSLA) stock has been in hyper-drive since the start of the year. In a matter of weeks, the market has shifted its view on the electric vehicle maker’s prospects, resulting in a big run-up in price for TSLA stock.

Before, concerns were running high that Tesla’s days of supercharged growth were behind it. Between the economic slowdown and rising competition, the market was worried that demand for the company’s vehicles would continue to weaken.

But now, following Tesla’s decision to slash vehicle prices, sentiment has shifted back to bullishness. Wall Street analysts and everyday investors alike are now more confident that Tesla is poised to recharge demand with little-to-no effect on its margins.

This appears to be wishful thinking. Looking at the details, this latest pricing move will probably affect profitability, and provide (at best) a brief boost to growth.

TSLA Tesla $172.71

TSLA Stock: Why the Analysts May be Wrong

It took some time for investors to warm up to Tesla’s price reduction gambit, but the analyst community was pretty quick to view it as a major positive for the company, and for the stock.

For instance, you may recall that, immediately after the EV maker slashed prices, prominent analysts covering TSLA stock, such as Wedbush’s Dan Ives and Morgan Stanley’s Adam Jonas, applauded the move, essentially arguing that concerns about margins were an overreaction. Following Tesla’s recent well-received earnings report, more analysts have hopped on the price-cut bandwagon.

In fact, many of them are taking things another step further. These analysts are not merely arguing that long-term growth matters more than near-term margins. Rather, they believe that the impact to margins will be minimal and will be outweighed by increased vehicle deliveries/sales.

These analysts also point to Tesla’s supposed cost advantages, as further proof that this EV leader can win a price war and continue to beat its competitors in terms of profitability. I can understand why many have come to this conclusion, but taking a closer view, it’s clear this is not the correct take.

A Possible Lose-Lose for Tesla?

Although critical of Tesla CEO Elon Musk’s bold statements regarding vehicle demand, I don’t deny that he is accurately describing the current situation. With such a dramatic drop in Tesla prices, it makes sense that warm leads are turning into sales.

However, I’m still skeptical that this EV powerhouse can continue to maintain high margins. As I’ve argued recently, the TSLA stock bulls may have overestimated how much of an edge the company gains from its giga presses. Tesla’s not the only automaker using highly-automated manufacturing processes.

Other “cost advantages” may disappear down the road. A good example is the company’s advertising and marketing costs. Tesla currently spends zero on advertising, but as competition rises, it may have to abandon this “no ads” stance.

That’s not all. Besides skepticism about future margins, I question whether the latest demand boost resulting from these price cuts is sustainable. Incumbent automakers are implementing price cuts of their own.

As more skeptical analysts have pointed out, auto demand could soften further, as macro challenges continue. In the end, the price war could produce a “lose-lose” outcome for the company: lower margins, with little positive impact to demand.

Bottom Line

My current view on Tesla may be contrary to the overall public’s view, but that may be changing. Sliding lower after its post-earnings rally, investors may be realizing too that the company’s key risks are not in the rearview mirror.

Tesla will probably continue to see its margins continue to erode. If demand keeps falling, and more competitors fight back with their own vehicle price cuts, the spread between Tesla’s profitability and the profitability of other automakers could narrow at a rapid pace.

Falling demand is also a big risk in terms of the company hitting its growth goals for 2023. If both these risks turn into full-blown issues, a corresponding full coughing-back of recent gains may not be out of the question.

Still vulnerable to a reversal in sentiment, holding off on TSLA stock remains the best move.

TSLA stock earns a D rating in Portfolio Grader.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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