Tesla Stock (NASDAQ:TSLA)
Tesla, Inc. (NASDAQ:TSLA) announced on January 12 that the prices of four of its car models would be going down. The announcement comes after a time when people in its home country bought fewer of its cars and when competition from traditional automakers grew.
The average discount was about 20%, most of which were made so buyers could get the $7,500 tax credit the government gives for cars that cost less than $55,000. The Model Y Long Range price has gone down from $65,990 to $52,990, which puts it just under the threshold.
Only Tesla bears will be happy about the news. Recent customers who paid the higher price will be angry, as will investors, who will now worry that margin compression and overall demand destruction were worse than they thought. (Not to mention the many companies with fleets of cars that got Tesla electric vehicles (EVs) for free for their fleets.)
It’s not surprising that a company whose CEO called its factories “giant money furnaces” is in big trouble now that consumer demand has dropped. The news doesn’t come as a surprise since Tesla said it would lower prices in China. Last week, a Model 3 was 30% less expensive in China than in the U.S. With the news from today, the gap has gotten a little smaller.
How China Began
China has been a source of optimism for investors for a long time. The company’s Shanghai factory and access to a seemingly endless supply of Chinese consumers who want Tesla products are seen as its most promising frontier. Like many other American companies that have tried to do business in China, Tesla and its investors have found it risky. Tesla has a lot on its plate, from shutdowns ordered by the government to EV makers backed by the government who are determined to “adopt” foreign intellectual property.
One exciting thing about the Tesla bull story is that the company will take over the Chinese consumer market without much trouble. This point of view is very naive. The Chinese have repeatedly shown that they are relentless copycats regarding technology. Traditional car makers in the West were surprised by Tesla’s early success and were slow to respond, but Chinese car makers have been anything but. Chinese automakers can make new models even faster than Tesla in many ways. According to the Wall Street Journal, Tesla’s overall market share in China’s electric vehicle market dropped from 13% in 2021 to 8% in the first nine months of 2022. For example, the BYD Company Limited Seal (OTCPK:BYDDF) is less advanced than a Tesla Model 3 but costs $8,000 less.
We, along with many others, have said that Tesla’s margins were too low to keep up. Tesla bulls stressed that the growing margins were here to stay and that Tesla had cracked the code and would leave traditional automakers in the dust (a curious thing to claim, especially when Tesla has almost always had a government-sponsored tailwind of one kind or another).
But we thought that margin compression would happen in some way or another and that the market would find a way to get back to normal. Almost certainly, this price cut will do that.
The steps to cut costs are also happening at a time when competition is tough. By 2022, almost 6% of all cars sold in the U.S. will be electric, up from 3% the year before. 65% of those sales came from Tesla, which is good news for bulls. They might be upset to learn that Tesla will control 72% of all sales in 2021.
Traditional car companies are also getting back up to speed. Ford Motor Company (NYSE:F) is almost done perfecting its strategy for electric vehicles (EVs), and General Motors (NYSE:GM), despite some early problems with the Chevy Bolt, has made a lot of progress. Add to that that people tend to stick with something other than one brand of EVs, and you have a recipe for trouble.
What Is Going to Happen Next?
We are sure that Tesla will get through this. We don’t trust its very high stock price. In this situation, one of the most obvious things that the company’s board of directors could do is start the stock buyback that was discussed when Tesla stock was going down in mid-2022.
They still need to do it, which is surprising.
This could be because the company’s board of directors and top executives don’t think the stock’s fall is over, especially given how much competition there is right now. It could also mean that they believe the stock is costly enough, making buying it a waste of money. Still, we wouldn’t be surprised if the company announced a new plan to buy back its shares.
Price cuts in the U.S. come after price cuts in other countries, and they don’t look good for Tesla Inc.’s margins in the short term. When you add this to the fact that Tesla’s market share is shrinking in China and not growing as quickly, or even stopping, in the US, and that traditional manufacturers are catching up, the future could look better for Tesla, Inc. Tesla stock has more to fall, so investors should be careful about buying it now.
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