Tesla Cuts Prices Again – Investors Should Focus on This Instead
It feels as if every day brings new price changes from Tesla TSLA –0.65% . Investors are getting used to them. The bigger deal now is the electric-vehicle company’s first-quarter gross profit margins are due to be reported in just a few days.
Reuters reported that Tesla cut prices for its electric vehicles in Europe and some other countries. The price of a Model 3 and Y in Germany were reduced about 5% and 10%, respectively.
Tesla didn’t immediately respond to a request for comment from Barron’s about the price cuts.
Tesla shares were down 1.3% on Friday to $183.44. The S&P 500SPX –0.36% and Nasdaq CompositeCOMP –0.52% were off 0.2% and 0.4%, respectively.
The shares were down more than the overall market, but the severity of the stock’s reactions to the company’s pricing has been fading.
For instance, when Tesla cut prices in China around Jan. 6, the stock traded off by almost 7% before closing up 2.5% on the day. When it lowered prices in the U.S. about a week later, shares fell almost 6%, before closing down about 1%. But when Tesla adjusted prices again in the U.S. on April 7, shares dropped almost 3% before closing only 0.3% lower in response.
The cuts might have been expected. The price of a base-level Model 3 in Europe, for instance, is higher than in the U.S. that is only a guideline for investors. Different countries have different incentives which can impact pricing. Competition, of course, matters as well. There are a lot of EV models on sale in China.
Germans can get a subsidy for EV purchases of about $5,000. The rear-wheel drive Model 3 qualifies for a $7,500 credit in the U.S., but that credit might be cut in half this coming week after the Internal Revenue Service updates qualification requirements to reflect where batteries and battery materials have been sourced.
Bulls believe price cuts also reflect Tesla’s falling costs, while bears believe price cuts are a sign of weakening demand.
Tesla reports first-quarter earnings on April 19. That will be the next chance bulls and bears have to hear from the company about demand and pricing.
Tesla delivered 422,875 units in first quarter, up about 36% year over year. Sales, however, will grow closer to 20% because of the cuts. Investors will be focused on automotive gross profit margins, wrote UBS analyst Patrick Hummel in a research note. Investors expect a number in the 20s.
“A miss on this metric would likely trigger a significant negative share price reaction,” added the analyst. He isn’t expecting that, though. Hummel projects 21.5% for first-quarter automotive gross profit margins. He rates Tesla shares a Buy and has a $220 price target.
The most recent price cuts, of course, fall in the second quarter, so they won’t affect first-quarter numbers. Future Fund Active ETF (FFND) co-founder and Tesla shareholder, Gary Black points out that new price cuts might generate lower earnings estimates for the second quarter.
Investors will have to worry about that next.
Source: Reuters
