After economic worries impacted demand for Tesla, vehicles in 2022, the electric vehicle pioneer announced a series of price cuts early this year, setting off margin worries.
A Tesla bull weighed in on a data point that casts a cloud on the efficacy of the price cuts.
The average price of a used Tesla vehicle has fallen by over $25,000 from its peak last July, said Charlie Bilello, chief market strategist at Creative Planning Investor.
In percentage terms, the decline is 37% to $42,785, he added.
— Charlie Bilello (@charliebilello) August 1, 2023
Commenting on the data, Future Fund’s Gary Black said this gives another reason to not cut prices on existing Tesla models. Tagging Tesla CEO Elon Musk and Head of Investor Relations Martin Viecha, the fund manager said it is much better to pursue next-gen $25,000-$30,000 lower cost vehicle to expand total addressable market than randomly cut price to drive short-term volume,
“Far better to take a long-term view and spend money on educating consumers why they should buy an EV,” he added.
Why It’s Important: When used car prices fall, profits of the in-house financing arm of automakers get squeezed as off-lease vehicles will be sold at less than the residual values used in the leasing contract. Additionally, lower used car prices mean lower residual value for new cars. The automakers are left with the choice of either keeping leases low to be competitive, which in turn could hurt profits, or keeping lease prices high, which will likely have a negative impact on sales.
Also, Tesla’s price cuts have led to gross margin erosion since the fourth quarter of 2022. GAAP gross margin fell from 25.1% in the third quarter of 2022 to 19.3% in the fourth quarter. The metric fell further to 19.3% in the first quarter of 2023 and 18.2% in the second quarter.
Auto gross margin, excluding regulatory credits, which analysts consider a more reliable measure, fell to 18.1% in the second quarter from 19% in the previous quarter.
As Tesla stock languished following the second-quarter earnings, analysts, including Black, attributed the lackluster sentiment to the lack of clarity on the margin outlook.
Although Tesla has the scale and technology to absorb the impact of the price cuts, aggressive reductions are invariably viewed negatively. An aggressive pricing strategy is often construed as an indication of weak demand and may have a depressing effect on the stock.
Produced in association with Benzinga