On Thursday, Tesla Inc’s shares took a hit of nearly 10%, after the company’s CEO Elon Musk signaled that it will keep cutting prices to drive up demand, even after taking a big hit to margins. The stock was trading at $163, which in turn dragged down other automakers. At least 15 analysts have lowered their price targets on Tesla, whose market value was on track to drop by $50 billion to about $517 billion if losses hold. That would put Tesla’s value below that of Meta Platforms Inc for the first time since 2021.
"Facing a volatile macroeconomic backdrop and weakening demand, Tesla continues to prioritize units over near-term profits,” said analysts at Canaccord Genuity.
Tesla’s gross margins fell in the first quarter to the lowest in more than two years, missing market estimates, after the company kicked off a global price war in January to defend its dominance in the U.S. and make inroads in China, its second-largest market.
Tesla’s automotive gross margin, excluding regulatory credits and leasing, stood at 18.3%, missing the above 20% target provided in January by Tesla CFO Zachary Kirkhorn.
Tesla has already slashed prices six times this year and Musk suggested more such moves ahead, saying the company will put sales growth ahead of profit in a weak economy. "We’ve taken a view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and a higher margin,” he said.
Investors dumped automakers from Europe to the United States on fears that margins will be sacrificed for maintaining share in a market that is slowing. U.S. automakers ranging from Ford Motor Co to startups such as Lucid Group Inc fell between 3.3% and 4.4%.
France-based Renault SA, whose finance chief said the company will not drastically cut prices on its EVs amid Tesla’s downward ”spiral,” was down 7.6%, while Germany’s Volkswagen fell 3.5%.
Tesla’s Strategy of Cutting Prices
Tesla has adopted the strategy of cutting prices to stay ahead of the competition and continue to grow. In the short term, this strategy is beneficial to the company, as it drives up demand and increases sales volume. However, it has come at the cost of the company’s margins.
The company’s automotive gross margin, excluding regulatory credits and leasing, stood at 18.3%, missing the above 20% target provided in January by Tesla CFO Zachary Kirkhorn. The strategy of cutting prices has also led to a global price war, with other electric vehicle makers like Ford, GM, and Volkswagen cutting prices to remain competitive.
Impact on the EV Market
Tesla’s strategy of cutting prices has had a major impact on the electric vehicle market. The company’s success has pushed other automakers to develop their own electric vehicles and enter the market, which has led to increased competition.
However, this increased competition has also put pressure on the margins of other automakers, who are now forced to cut prices to stay competitive. This has led to a downward spiral in the EV market, with automakers struggling to maintain margins while also driving up demand.
What’s Next for Tesla?
Tesla’s strategy of cutting prices to drive up demand may work in the short term, but it remains to be seen whether it is sustainable in the long run. The company has already slashed prices six times this year, and Musk has suggested more such moves ahead.
Tesla will need to find a balance between driving up demand and maintaining margins if it wants to remain competitive in the long term. The company’s success has put it in a position of leadership in the EV market, but it will need to innovate and adapt to continue to grow and stay ahead of the competition.