Tesla's Stock is Getting Pummeled by its Pricing Saga

There has been a lot of activity going on at Tesla in the last five months, particularly with regard to revising the price tags on its electric vehicles. In that short time period, the EV maker has cut prices, cut them again, increased prices, reported record quarterly deliveries, and then once again cut prices again.

‍

This makes a big difference for the business of the EV leader in terms of demand, profits, and share price.

‍

Last week, Tesla announced that it was reducing prices across its entire EV lineup in the U.S. Tesla made the announcement a few days after it reported record quarterly deliveries on April 2. In the first quarter of this year, Tesla delivered 422,875 vehicles.

‍

A price cut was first introduced by Tesla (ticker: TSLA) in China during its fourth quarter. The company then announced in early January that it would be slashing its prices in the U.S. and around the world. There was a major price cut in January that helped Tesla vehicles to get below the price caps that were necessary to qualify for the new EV tax credits.

‍

A favorable ruling from the Internal Revenue Service regarding vehicle classification affected the credits that could be claimed by consumers in February, which actually resulted in U.S. prices going up, a little.

‍

There is a lot of confusion among Wall Street analysts and investors as they try to figure out what this all means. "Considering Model S and X's weak first-quarter deliveries, everyone expected [last week's] price cut on the Models S and X,” says Gary Black, co-founder and Tesla shareholder of Future Fund ActiveFFND +0.83% exchange-traded fund (FFND). "The Model S and Model X are Tesla's most expensive vehicles to date. It was a surprise to me when Tesla cut the price of its bestselling model, the Model Y."

‍

Black is a little concerned about the cut that was made. It is estimated that Tesla will make a loss of $700 million a year as a result of the price reductions, and the move will not move the needle on volumes or affordability.

‍

Bernstein analyst Toni Sacconaghi did not appear to be surprised by the cut, however. According to a report he wrote on Monday, despite Tesla CEO Elon Musk stating that orders were twice as high as production capacity after price cuts around the globe in early January, deliveries in the first quarter lacked behind the production, pushing up new-vehicle inventories for the fourth consecutive year.

‍

“No doubt, there is no doubt that Tesla's price reductions are a result of Tesla's need to stimulate demand and are a clear trade-off between margins and volume,” Sacconaghi wrote. “Tesla's automotive gross profit margin will be pressured by additional price cuts in other geographies in the near future.” He sees a probability of more price cuts in other geographies.

‍

Based on his analysis, he believes Tesla will achieve a gross profit margin of about 20.5% in the first quarter of 2023. It is estimated that the Wall Street consensus is at about 21%. In the first quarter of 2022, Tesla reported automotive gross-profit margins, excluding any regulatory credits that may have been applicable, of about 30%, excluding the benefit of any regulatory credits.

‍

Sacconaghi remains negative on Tesla shares as a result of the cuts. With a price target of $150, he rates them as a Sell. Neither Citi analyst Itay Michaeli nor Wolfe Research analyst Rod Lache rates Tesla stock as a buy.

‍

Tesla stock has a price target of $185 set by Lache. Over the weekend, he wrote in a blog post that the cuts will raise questions about the vehicle demand for Tesla, although he added that Tesla's costs are falling as a result. Tesla is ramping up production at two new plants in Texas and Germany at a time when raw material prices are down from record levels. By increasing output through the construction of new plants, fixed costs are spread over a larger number of units.

‍

Michaeli has set a price target of $192 for Tesla stock based on his research. The analyst believes that when Tesla announces its first-quarter numbers after the close of trading on April 19 after the close of trading, investors should focus on the gross-profit margins. Assuming that Tesla has a demand problem, we would be able to give some credence to the bear argument that Tesla has weaker margins than expected. Tesla's better-than-expected margins would suggest that Tesla is making full use of its cost structure to expand its market share around the world in an effort to increase its profitability.

‍

It might be impossible to predict how the first-quarter gross-profit margins will be reacted to. Next week, after the results are released, investors can expect a more volatile trading environment, so they need to keep an eye out for that.

‍

The performance of Tesla stock as it approaches earnings, of course, will influence the direction in which the shares move. The share price of Tesla closed down by 0.3% on Monday. Despite the slight gain of 0.03% for the S&P 500SPX and -0.25% for the Nasdaq CompositeCOMP, both were nearly unchanged.

‍

After reporting record first-quarter deliveries on April 2, Tesla stock has dropped in five consecutive trading days since the company reported record first-quarter deliveries on April 2. The stock has lost 11% in that span, but it has still gained almost 50% so far this year despite the stock losing 11% over that span.

‍

For Tesla stock, the beginning of 2023 has been quite an exciting one.