The overwhelming story that came from Tesla’s third-quarter 2023 earnings was one of ongoing price cuts, falling gross margins and frustrated investors.
The price war that Tesla (TSLA) – Get Free Report was so determined to win last year pushed the company’s third-quarter gross margin down to 17.9%, well below the 25.1% margins the company boasted in the year-ago period.
And where investors and analysts were looking for confirmation that the margins had finally reached their bottom, they instead received plenty of caution from CEO Elon Musk, who said that making Teslas affordable is the company’s foremost challenge.
Related: Why Elon Musk changed his Tesla tune between the second and third quarters
“I keep harping on this interest thing, but I mean, it just raises the cost of the car,” Musk said at the time. “That is really the thing that must be solved is to make the car affordable for the average person.”
Just a few weeks after announcing that it had delivered a record 1.81 million vehicles throughout 2023, and about a week before reporting fourth-quarter earnings, Tesla has re-engaged its controversial price cuts.
After cutting the price of its Model 3 and Model Y in China last week, the company on Wednesday cut the prices of its Model Y vehicles in Germany. Tesla brought the price of its Model Y Long Range down to 49,990 euros ($54,340) and its Model Y Performance to 55,990 euros, a 5,000 euro cut for each car.
The company also cut the price of its Model Y rear-wheel drive models by 1,900 euros, bringing it down to 42,990 euros.
The move comes after Tesla last week announced that it would suspend most of its vehicle production at its Berlin factory between Jan. 29 and Feb. 11.
It also comes in the wake of Volkswagen beating out Tesla as the largest EV seller in Germany in 2023, with Volkswagen taking a 13.5% market share to Tesla’s 12.1% market share. Tesla, according to data from German federal motor authority KBA, recorded 63,685 new vehicle registrations in the country last year, a 9% drop that came as EV sales in Germany rose 11.4%.
Related: Elon Musk’s Tesla earnings call was a ‘mini disaster’
Analyst: Price cuts are ‘value destructive’
Based on an estimation that European Model Y sales account for 11% of Tesla’s total volume, Gary Black, managing partner of the Future Fund, reduced his full-year 2024 Tesla earnings estimates.
Black expects this latest round of price cuts to shave 15 cents off Tesla’s full-year earnings this year; he reduced his earnings per share estimate to $3.75 from $3.90.
“In our opinion, Tesla (management) still does not see that cutting configurator prices and inventory discounts by the same amount is value destructive, since it merely accelerates orders from future periods,” Black said. “In essence, Tesla is training its customers to wait for a deal.”
Black said that Tesla ought to explore other, cheaper methods of growing unit volumes, such as mass advertising campaigns designed to assuage potential customers’ concerns over EV range, charging and general capabilities, regardless of the weather.
Tesla delivered 484,000 units in the fourth quarter of 2023, and 1.81 million for the full-year, about on track with estimates.
“I’m not asking that Tesla spend (money) on advertising that it could spend on product quality, engineers or battery technology,” Black said in October. “I’m asking that Tesla take 5-10% of the billions it will spend to cut price and try advertising to educate non-EV users why they should buy an EV.”
Musk, who has been historically averse to advertising, said during Tesla’s third-quarter earnings call: “Informing people of a car is great. But they cannot afford … (it) doesn’t really help.”
This latest in price cuts comes on the heels of a year that saw record EV adoption alongside a growth rate that was nearly half of what it was the year before.
Shares of Tesla were down more than 3% midday Wednesday, and have fallen more than 14% so far in 2024.
Tesla will report earnings after the bell on Jan. 24.
Contact Ian with tips via email, [email protected], or Signal 732-804-1223.
Related: Here’s the full story behind electric vehicle adoption
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