As inventories reportedly piled up, analysts and investors predicted Tesla price cuts — and they were right.
In addition to price cuts for the Model 3 and Model Y in several European countries, Tesla has slashed the prices of these models in the U.S. on a large scale, likely in the name of stimulating demand and to bring these cars below inflationary EV price caps -Reduction Act tax credit.
Wedbush analyst Dan Ives said the cuts are “the right medicine at the right time”.
In a note to clients today, Ives argued that lowering prices is the right strategic move given the potential for weakening demand and increasing competition.
Starting with the Model 3, the RWD version goes from $46,990 to $43,990, down 6.4%. Even bigger, the Model 3 Performance jumps from $62,990 to $53,990, a 14.3% price drop. Note that the maximum IRA tax credit price for cars like the Model 3 is $55,000.
Even bigger price cuts have arrived for the popular Model Y SUV. The Model Y Long Range goes from $65,990 to $52,990, down almost 20%. Model Y performance jumps from $69,900 to $56,990, down nearly 19%. Note that the Model Y has the same price cap of $55,000 in the 5-seat configuration.
Prices for the new Tesla Model Y (tesla.com)
The 7-seat version of the Model Y, which qualified for the $80,000 EV price cap, is now up $1,000 in price.
While those prices are likely to boost volume tremendously in the first quarter and bring more buyers back to Tesla from other EV brands, larger concerns remain.
The IRS’s new guidance on battery components and assembly is coming in March and will likely cut the $7,500 tax credit by some amount as automakers scramble to meet those requirements. This would then make the Model 3 and Model Y and other competitors more expensive and thus push demand further forward in Q1.
An even bigger problem is margin compression. The cut in prices from 6% to nearly 20% cuts deep into Tesla’s profit margins, which were the envy of the auto world before these cuts (Tesla’s auto gross margin was 27.9% in the third quarter of 2022, its final quarter).
The story goes on
While today’s stock reaction reflects that impact on margins, Ives said it’s the right move over the long term.
“Tesla now has a global reach (Austin, Berlin, further expansion in China) that it didn’t have a few years ago and margin flexibility to take aggressive moves like this to gain further market share in this EV arms race win,” he writes.
Ives says the price cuts will boost global demand by 12-14% in 2023 as Tesla and Musk go on the “offensive” in a slowing environment.
“This is a clear shot across the bows of European automakers and US stars (GM and Ford) that Tesla will not play well in the sandbox in an EV price war that is now underway,” Ives said while explaining his outperformance -Valuation maintained and price target $175.
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Pras Subramanian is a reporter for Yahoo Finance. you can follow him Twitter and further Instagram.
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