In addition to price reductions for the model 3 and Model Y In several European countries, Tesla has slashed prices for these models in the US, likely in the name of stimulating demand and to bring these cars under the Inflation Reduction Act’s EV tax credit price caps.
Wedbush analyst Dan Ives said the cuts are “the right medicine at the right time”.
In a note to clients today, Ives argued that lowering prices is the right strategic move given the potential for weakening demand and increasing competition.
Starting with the Model 3, the RWD version goes from $46,990 to $43,990, down 6.4%. Even bigger, the Model 3 Performance jumps from $62,990 to $53,990, a 14.3% price drop. Note that the maximum IRA tax credit price for cars like the Model 3 is $55,000.
Even bigger price cuts have arrived for the popular Model Y SUV. The Model Y Long Range goes from $65,990 to $52,990, down almost 20%. Model Y performance jumps from $69,900 to $56,990, down nearly 19%. Note that the Model Y has the same price cap of $55,000 in the 5-seat configuration.
Prices for the new Tesla Model Y (tesla.com)
The 7-seat version of the Model Y, which qualified for the $80,000 EV price cap, is now up $1,000 in price.
While those prices are likely to boost volume tremendously in the first quarter and bring more buyers back to Tesla from other EV brands, larger concerns remain.
The new guidance from the IRS to battery Components and assembly arrive in March and will likely cut the $7,500 tax credit by some amount as automakers scramble to meet those requirements. This would then make the Model 3 and Model Y and other competitors more expensive and thus push demand further forward in Q1.
An even bigger problem is margin compression. The cut in prices from 6% to almost 20% cuts deep into Tesla’s profit margins, which were the envy of the auto world before these cuts (Tesla’s auto gross margin was 27.9% in Q3 2022, final quarter).
While today’s stock reaction reflects that impact on margin, Ives said it’s the right move over the long term.
“Tesla now has a global reach (Austin, Berlin, on China build-out) didn’t have it a few years ago and has margin flexibility to take aggressive moves like this to gain further market share in this EV arms race,” he writes.
Ives says the price cuts will boost global demand by 12-14% in 2023 as Tesla and Musk go on the “offensive” in a slowing environment.
“This is a clear shot across the bows of European automakers and US stars (GM and ford) that Tesla will not play well in the sandbox with an EV price war now underway,” Ives said, while maintaining his outperformance rating and price target of $175.