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Did Tesla grow too fast? Elon Musk may be admitting it without saying so. The Tesla CEO is cutting prices for Tesla in key European markets by thousands of dollars per car in the latest sign that the automaker got out over its skis. In Germany, Europe’s largest car market, the most glaring move was slashing the starting price for an entry Model 3 Performance to just €54,990, a reduction of €6,000 (by comparison, the standard rear-wheel version only saw a €2,000 cut to €41,990). Other cuts were found in France, Norway, the Netherlands as well as smaller markets like Israel and Singapore.
For its part, Tesla released a rare official statement on Friday explaining the decision, which followed a similar move just one month earlier.
“Our mission is to accelerate the transition to renewable energy,” the company wrote in a comment obtained by InsideEVs. “Our masterplan has set a clear pathway to achieve that mission: the transformation of cost-intensive small-series products to cheaper mass-series vehicles.”
The reaction from investors was immediate. Future Fund co-founder Gary Black, a long-time bull that maintains Tesla as his largest position, cut his 2023 earnings estimates by 20 cents to an even $4 per share. For the first time, the money manager forecast that Tesla will earn less than the year before, when it posted earnings of $4.07 per share.
Tesla has long used its sticker price to balance supply with demand. If the order book was brimming over and customers found themselves enduring long waits before getting their car, Musk would hike them to reduce affordability.
Yet consistently cutting prices can be a risky endeavor. If customers start to expect a carmaker will continue to lower their asking price, then they might hold off on their purchase. Moreover, sizeable reductions in new car prices immediately reduce the resale value of used cars, angering existing customers that see their asset depreciating.
Cutting $TSLA ests and PT to reflect lower Europe prices and auto GM%. My new EPS ests:
– 2023 $4.00 (was $4.20)
– 2024 $6.20 (was $6.60)
– 2025 $8.60 (was $9.40)
– 2030 $24 (was $27)
WS will likely wait until earnings Wed to adjust ests. My new PT is $320. Details – Subscribers. pic.twitter.com/8lCVGb0jJC— Gary Black (@garyblack00) April 14, 2023
Musk now finds himself on the horns of a new dilemma. Ever since April 2022, the company has consistently built more cars than it delivered to customers, causing inventories of its increasingly aging vehicles to swell just as more competitors are hitting the streets.
Next week alone, Volkswagen Group will unveil the series production versions of two new electric vehicles in the VW ID.7 sedan and Cupra Tavascan crossover, expected to compete with the Tesla Model 3 and Model Y when they hit European markets later this year.
Either Musk can slow down his production lines, risking the ire of growth-stock investors, or he keeps cutting prices and sacrifices profit.
With just days to go before the company reports first-quarter earnings on April 19th, the price cuts have opened up a fierce debate within Tesla’s community of fans and investors.
Some argue lower prices help expand the pool of potential customers that can afford a Tesla, furthering its stated goal of accelerating the push to sustainable transportation. Others are however alarmed and urge Musk drop his ideological opposition to commercial spots and advertise the advantages of Tesla’s products.
Much could hinge on Wednesday’s results, which will reveal whether Tesla’s cost-cutting culture has found a way to comfortably absorb the hit without endangering profitability. Should Tesla pull off an automotive gross margin above the 20% minimum threshold finance chief Zach Kirkhorn has promised, then concerns will likely ease.
If not, the debate will only intensify.
