Investors whose shares fell 65% last year are looking for clarity on demand, price cuts, and production ahead of Wednesday’s earnings report. While chief executive officer Elon Musk has reassured them that he will make good on the company’s promise to build 1.8 million cars this year, a drop in first-quarter deliveries prompted the EV maker to cut US prices for the sixth time.
Tesla’s lowering of prices is another attempt to boost the sluggish electric vehicle market. But its moves could backfire if the inflation rate cools and Washington introduces stricter emissions standards that limit tax credits for buyers of zero-emission vehicles.
The automaker also cut its base prices in Germany and France, making it cheaper to buy a Model 3 Performance or a long-range Model Y. Its move expands the range of models eligible for the federal Biden administration tax credit, which a buyer gets if they purchase a Tesla with an up to $7,500 discount.
With the new price reductions, the Model 3 Performance now costs $43,990, and the long-range Model Y is $36,490, including the credit. That equates to a discount of 31%.
That’s still higher than the average cost of a traditional gasoline-powered car, but it’s more affordable than most EVs. It also indicates how far out front Tesla is in the EV race, which is currently led by Ford Motor Co (NYSE: F) and other legacy automakers.
It’s also important to note that many auto analysts strip out the governmental credits that Tesla gets for selling only zero-emission vehicles. It gets hundreds of millions of dollars per year from those credits.
These credits are designed to encourage the sales of zero-emission vehicles and to avoid fines for automakers that don’t meet emission standards. But they can also drag on profitability because they lower the company’s automotive gross margin, which is how much it makes on every unit sold.
Morningstar Equity Strategist Seth Goldstein said that this drop in gross margins is a sign that Tesla can’t quite make up the difference between its raw material, shipping, and other costs. However, he expects Tesla’s profit margins to bounce back more extended term.
However, he added that the price drops are “obviously a headwind” and may have impacted profitability negatively in the quarter. Nevertheless, he predicts that despite the decline in profit, Tesla will maintain industry-leading margins and be in a better position to weather economic headwinds than many of its peers.
That’s because a broader retraction in the economy should result in lower fuel costs for consumers, which will help the EV market grow. As a result, Tesla may be able to boost its global sales by reducing its average price per vehicle. Goldstein said that could help Tesla hit its 1.8 million sales target this year. And if it can continue to increase production and make a strong showing at the Auto Show in Detroit later this month, it could also see an improvement in its stock price.