Tesla stock dips as analysts warn price cuts will weigh on margins

By Senad Karaahmetovic

Tesla (NASDAQ:) shares are moving lower in premarket Monday after the electric vehicle (EV) maker delivered the fifth series of price cuts since January.

According to the company’s website, Tesla slashed prices on the Model 3 sedan and Model Y crossover by $1,000 and $2,000, respectively. The EV maker also cut prices on both versions of its more expensive Model S and Model X by $5,000.

“We continued to transition towards a more even regional mix of vehicle builds, including Model S/X vehicles in transit to EMEA and APAC,” the company said in a press release.

The cuts come after Tesla said it delivered nearly 423,000 EV units in the first quarter. Several media outlets have reported that the company’s internal guidance is to deliver 2M cars in 2023 while analysts expect this number to be lower by around 10%.

Tesla is due to report its Q1 results on April 19.

What analysts are saying about price cuts

While Tesla is attempting to reaccelerate growth by offering cars at lower prices, analysts warn that the company’s margins could be at risk. The Street sees Tesla reporting a 21.1% auto gross margin for Q1.

Wells Fargo analysts believe Tesla will miss the >20% target for auto gross margins. They also see Tesla reporting lower-than-expected EPS for the first quarter. Moreover, the analysts say Tesla will need to average ~526K deliveries from Q2 to Q4 to hit its 2M target.

“Our estimated auto gross margin ex credits of 18.3% is below guidance of >20% and Visible Alpha (VA) consensus of 21.7%. We forecast ASPs for $46K, also below TSLA’s target of >$47K. Our Model 3/ Y pricing is down 12% vs. Q3, below our est. avg. price cut of 14%, reflecting model & trim mix help,” they said in a note.

Citi analysts add that price cuts weren’t surprising and are likely to place a further focus on the Q1 auto gross margin.

“A stronger-than-expected gross margin outcome would support the contention that Tesla’s latest price cuts are coming from a position of cost strength while also possibly reflecting lower input costs. An in-line/softer gross margin outcome could revive concerns over capacity/product aging while placing 2023 consensus estimates at risk since they call for improving gross margins throughout the year,” they wrote in a note.

“At ~46x ‘23 consensus EPS, we don’t think the latter outcome is currently priced-in, making for a less than compelling risk/reward into the quarter under the current macro backdrop. We prefer staying opportunistic.”

Finally, Bernstein analysts expect Tesla to continue cutting prices to stimulate demand.

“We note that lead times were relatively weak (<4 weeks) for nearly all Tesla models in all geographies, *except* for the Model Y in the US. The fact that Tesla is cutting price on its longest lead time model suggests other price cuts are likely to follow, particularly since Model 3 SR rebates will fall $3750 on 4/18, and competition continues to intensify.”

Given that they expect more price cuts, the analysts also don’t believe that Q1 margins may be the bottom. They expect Q1 auto gross margin of 20.5%, missing the 21.1% consensus.

“We maintain that price cuts have and will undermine industry profitability (including Tesla’s), but that incumbents are deep pocketed and not likely to back down. Some investors maintain that Tesla’s recent price cuts reflect a structural cost advantage that will enable it to pressure rivals and capture outsize volume and dominate the EV market. Ultimately, we believe that the automotive market is hyper-competitive, and very difficult for any OEM to sustain an ongoing competitive cost advantage,” they finally concluded.