Tesla Discounts Could Perk Up Sales And Lay Foundation For New Models, Higher Share Price

Summary

• The 65% decline in the value of Tesla shares since late 2021 represents for investors a multifactorial puzzle to decipher, a large component of which is macroeconomic.
• Record Q4 revenue and beat on earnings lay foundation for more capacity and path to "affordability."
• Evidence suggests that TSLA management’s recent decision to cut prices in the face of competitive and economic forces weighing on demand is stimulating consumer interest.
• The company and its chairman face serious legal challenges that could impede the stock’s recovery, given growing consumer interest in battery-electric vehicles (BEVs) worldwide.
• Shares remain a hold, positive factors such as brand equity and price-cutting held at least partially neutralized by adversities.

Tesla Showroom. Q4 Financial Results Impressive.

Joe Raedle

The Federal Reserve’s decision in early November 2021 to pursue price stability by tightening credit hurt the entire stock market, though disproportionately tech and growth stocks like Tesla (NASDAQ:TSLA) that rely on low interest rates to facilitate future as opposed to current earnings.

The Nasdaq composite, which is weighted toward tech and growth companies, is down 30% since that policy shift, with Tesla – a tech and growth stalwart – down 68%. Heavy selling of tech funds undoubtedly helped drag down TSLA shares. Peers such as PayPal (PYPL) are down even more.

Impressive numbers

Tesla, announcing fourth quarter financial results after the market close on Wednesday, surpassed analyst expectations for Q4 revenue and earnings. Acknowledging a decline in profit margin and average transaction prices, the company noted that “affordability” would be necessary for Tesla to reach its goal of becoming a company that sells multiple millions of cars annually.

TSLA’s difficulties, however, go far beyond the Fed’s tightening of credit and the expectation of resulting slower economic growth. U.S. vehicle sales in unit terms last year for all automakers was the worst in a decade. Among the headwinds afflicting the company is a wave of new BEV competition from global automaking incumbents as well as from startups. The travails of Elon Musk, chairman, as he contends with legal and regulatory battles raise uncertainty about top-management stability.

Amid the gloom triggered by the fallen stock valuation brings with it at least one hopeful sign: Tesla is cutting prices on its vehicles, which one automotive research agency reports has begun to stimulate consumer interest. Often, when market leaders are faced with a drop in demand, they’re reluctant to offer discounts or financial incentives – particularly on luxury items - because they fear the move will cheapen the brand.

Solid order book

Musk, speaking to analysts following the earnings announcement, said “thus far in January we’ve seen the strongest orders year-to-date than ever in our history. We’re currently seeing orders of almost twice the rate of production.” Evidently, the price cuts are having the intended effect.

Prototype of Tesla semi (Tesla)

Musk temporarily has become mired in litigation and distraction related to his acquisition of Twitter. Yet he sees Twitter as a fundamental tool that will help stoke Tesla’s growth – as he explained Wednesday, while plugging his newest asset:

I’ve got 127 million followers. And it continues to grow rapidly. That suggests that I’m reasonably popular. I might not be popular with some people. But for the vast majority of people, like the follower count speaks for itself. (I have one of) the most interactive accounts, social media accounts, maybe in the world, certainly on Twitter, and that actually predated the acquisition. So Twitter is actually an incredibly powerful tool for driving demand for Tesla. And I really encourage companies out there of all kinds automotive or otherwise to make more use of Twitter and to use their Twitter accounts in ways that are interesting and informative, entertaining, and it will help drive sales just as it has with Tesla.

Tesla’s price cuts suggest that hard-headed realists in the C-suite hold sway: The company is determined to ignite vehicle sales, despite any short-term financial penalty. Tesla sold more than 1.31 million vehicles for the year, falling short of its 50 percent growth forecast. Vehicle deliveries rose 40 percent for the year while production grew 47 percent to 1.37 million.

Fledgling competitors to Tesla are struggling as well, hit with parts and material shortages. Lucid (LCID), which makes the $170,000 Air sedan, cut delivery forecasts twice in 2022 and now plans to develop less-expensive versions to address competitive pricing pressure.

Broad discounting

In mid-January, Tesla listed its top-selling Model Y Long Range with all-wheel drive — the entry-level version in the U.S. — at $52,990 before shipping. The new price represents a reduction of $13,000, or 20%, over the crossover's previous price. Additionally, the lowered price put the Model Y under the $55,000 price cap for tax incentives under a federal rule change that took effect Jan. 1. Tesla also reduced prices significantly for the Model 3 compact sedan, Model S midsize sedan and Model X midsize crossover.

Edmunds, the online car shopping and review guide, noted on Jan. 19 that searches of Tesla brands more than doubled to 4% of all searches from 1.9% the previous week, prior to the price cuts. Tesla Model Y was the second most researched model after Honda CR-V. The site generates more than 20 million visits a month.

"Consumers have grown accustomed to price hikes and the expectation to pay over MSRP for quite some time, so a discount this generous or easy to comprehend was understandably welcomed by car shoppers," said Jessica Caldwell, Edmunds executive director of insights. "These price cuts, as well as inventory on the ground, will win Tesla market share and help consumers overlook the brand's aging line-up. Lower prices and immediate availability undeniably resonate with the American consumer."

As might be expected, price cuts weren’t good news for owners of Tesla vehicles, whose resale or residual value dropped as well.

Buying spurt ahead?

Ivan Drury, an Edmunds analyst, said “price cuts of 20% or more, with incentives, nationwide don't come around often, so acting now is in your best interest before any corrections in the opposite direction.” Just how much Tesla’s price cuts translate into sales will become clear in the next 30 to 60 days.

All told, Tesla appears poised for a short-term growth spurt, which could boost shares. Though a seller of covered calls and covered puts, I have avoided owning Tesla until recently when shares were put to me by virtue of the steep drop in price. (A decade ago, I didn’t believe the company would amount to much – a mistaken judgment.) I’m comfortable owning Tesla shares today and continue to write out-of-the-money calls. As new Tesla products such as the Cybertruck and semi-trailer come to market – and evidence of the latest price cuts become clear – I’ll re-evaluate. For the time being, my hold rating stays in place.

Disclosure: I/we have a beneficial long position in the shares of TSLA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.