Tesla - Desperate Price Cuts Or A Maturing Company?

Tesla’s journey to bonafide car company is featuring a swift revaluation, catching down to the old guard. Can Tesla’s share price rally again or does more realism await? The company’s been cutting prices lately and scheduled to report earnings after the close on Wednesday January 25th.

The Tesla selloff to close out 2022 was rapid and brutal. Even as the share price fell into oversold territory on the RSI, it just kept on dropping before finally putting in a daily hammer on the 6th of January and recovering somewhat.

Tesla recently made the decision to slash prices across some of the more popular models in various countries. By lowering the price in the US to less than $55,000, buyers now qualify for tax incentives. Similar benefits exist in other countries too. It’s a move that's expected to increase overall sales volumes, but will those higher sales come at the expense of profitability?

That’s the question dividing analysts. Is this a response to slowing demand or a maturing company? Perhaps a little of both…

Goldman Sachs analysts make the case that “although the reduced prices for Tesla vehicles will likely result in lower earnings, we expect this to help drive stronger volumes all else equal.”

The rising input and logistic costs that were a headwind over the past twelve months or so have abated recently, and tax incentives being available for customers are clearly a benefit (although customers that purchased just before the price cuts aren’t going to be happy!).

Goldman’s analysts see this as a relative benefit for Tesla in the EV space and are quick to point out that Musk’s company is still an outlier in the profitability stakes:

The ability for Tesla to further improve unit economics and with more volume at lower prices is an incremental negative for competitors in our opinion. While Tesla has some of the strongest EBIT margins for companies in the auto industry (either ICE or EVs), most auto OEMs (original equipment manufacturers) have limited or even negative profit margins with EVs.

As the evolution of Tesla continues, all eyes on that prize. Scaling, while maintaining profitability. Much will depend on the underlying demand in the economy however. It’s hard to believe that Tesla would choose to voluntarily slash prices while demand remained strong.

Goldman’s choice of words is intriguing too. “A negative for competitors”, rather than “a positive for Tesla”. On a relative basis, Tesla could benefit. But continuing concerns around consumer weakness and rising credit costs are likely to cap that optimism.

Heading into the earnings report, this will be a key theme to monitor, as will the market response if Tesla once again misses the delivery estimates.

Analyst expectations via Newsquawk:

• Quarterly EPS $1.13
• Quarterly Revenues $24.16bln
• Full Year EPS $4.02
• Full Year Revenues $81.81bln

Overall, there’s a chance that the worst news is already in the price after such a fast revaluation. However, the ever-present risk is Tesla’s $400bn market cap. Perhaps one to play over shorter time horizons rather than a long-term buy and hold?

Although you could say the company has a far better chance of growing into this valuation than it did at the $1 trillion market cap attained last year…