Thursday's Market Minute: Tesla's Cuts Have a Price

Tesla’s TSLA long-awaited second quarter results signaled that the six rounds of price cuts as of late do not come without cost. The EV-maker’s margins showed the sting many analysts had feared, and naturally, there is much debate about what comes next for one of the world’s largest automakers. The first quarter margin miss proved that price cuts were not able to offset to the extent the bulls had hoped.

Add this to its recent second quarter price reductions, and shares are falling in reaction. Margins are now being viewed as more vulnerable, especially given that Tesla remains committed to 2023 volume targets against a weaker macroeconomic picture. 

An RBC Capital analyst believes margins will get worse before they get better. But the analyst noted that Tesla is playing a long game, as the company works to get more vehicles to its customers – in terms of affordability and ease of access. He said Tesla "believes the lifetime value of a new customer exceeds the lost revenue from the price cuts, so growing volumes is still the right decision.” RBC noted the after point of sales value of a Tesla owner exceeds traditional OEMs and with its leadership position, and provides them with greater upfront pricing flexibility. 

Price elasticity is another factor many are considering, with the thinking that consumers will grow more demanding, or just patient. Meaning, consumers will begin to hold out for lower priced vehicles. This elongated cycle could become concerning to Tesla, and lead to further margin pressure for the foreseeable future.

Following the first quarter print Wednesday afternoon, Tesla erased a portion of its year-to-date gain, now up about 36% since the start of 2023, but still up roughly 65% from its 52-weeek low. Tesla still has one of the highest buy-rating ratios among S&P 500 stocks, with price targets among Street analysts ranging from $105 to $320 a share.