Cheaper Teslas are hurting profits, but Elon Musk plans to keep slashing prices. Here’s why
- Tesla’s profit margins plunged last quarter after the EV maker made aggressive price cuts.
- On an earnings call, CEO Elon Musk said he’d push ahead with the strategy.
- Musk could sacrifice short-term profits to grow Tesla’s market share.
Tesla disappointed its shareholders on April 19 when it revealed how its aggressive price cuts have affected its business.
The carmaker started slashing the price of its Model Y SUV and Model 3 sedan in January — and its latest earnings report showed that profit margins have fallen dramatically over the past quarter.
In a call with investors, CEO Elon Musk hinted that he’ll push ahead with the strategy in a bid to lure customers away from traditional automakers and EV rivals.
But analysts have warned that Tesla may have to sacrifice its short-term financials to boost its market share — and it might be too early to say whether the price war will help or backfire.
Tesla has cut prices six times this year.
The entry-level Model 3 now costs less than $40,000, down from $62,990 at the start of the year. The Model S and Model X are also 20% cheaper than they were at the beginning of 2023, even after Tesla raised US prices Thursday.
But these cuts have eaten into Tesla’s profit margins. In Wednesday’s earnings report, the company disclosed that its profit had plunged 24% year-on-year to just over $2.5 billion.
Shares fell nearly 10% at Thursday’s market close, wiping out $56 billion worth of valuation — a figure higher than Ford’s market cap.
Wall Street had anticipated that margins would fall but traders were likely surprised at just how big the drop was, according to Morningstar equity analyst Seth Goldstein.
“The extent of margin declines was below what I was expecting and what the market was expecting too,” he told Insider. “That’s why we saw the stock sell-off, it was a reaction to that.”
Tesla wants market share
In Wednesday’s earnings call, Musk told investors that the company will put sales growth ahead of profit in a weak economy.
“We’ve taken a view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and a higher margin,” he said.
Musk’s willingness to pursue a strategy that is hitting profits suggests he might be eyeing a market occupied by legacy automakers. Ford was one of the only traditional automakers to respond to Tesla’s cuts in January, dropping the price of its Mustang Mach-E, but it has not made further reductions.
While price competition isn’t uncommon in the auto industry, car companies might struggle to match the size of Tesla’s cuts without hurting their own profit margins.
“I think legacy automakers are left scrambling right now — do they cut prices, or do they sell fewer EVs at a higher price to preserve profits? They’re faced with a choice between cutting prices or hurting profits even more. That makes for an interesting scenario in terms of how they respond,” Goldstein said.
Musk’s cost-cutting could boost margins long-term
Tesla’s margins fell last quarter because price cuts ate away at revenue, but margins could rebound if Musk manages to cut costs.
Musk and other executives said Tesla would bring in innovative manufacturing techniques and use smaller factories in a presentation on March 1. The EV maker is also rumored to be developing a cheaper model, expected to cost around $25,000.
“They’re passing these cost savings that they’re making on to the consumer, whereas I think historically that would just be margin that would go into the books of the automaker,” Caspar Rawles at Benchmark Mineral Intelligence, a price-reporting agency, previously told Insider.
“But Elon alluded that they have a mandate to try and maintain a low sticker price for these vehicles, which obviously has been extremely challenging over the last couple of years with all of the supply chain problems that they faced,” he added.
By slashing prices and aggressively cutting costs, Tesla is choosing to suffer short-term profit pain in exchange for growing its longer-term market share — but it will be a while before Musk can say whether that was the correct approach.
“Right now, it looks like the company’s competitive position is being prioritized over protecting profitability,” AJ Bell investment director Russ Mould said Thursday. “Only time will tell if that is the right move.”