Tesla stock is down 15% in 6 months. Will price cuts reverse this trend?

With a view to buying Tesla stock, our writer assesses how the recently announced price cuts will impact on the company’s earnings.

James Beard

After studying Business Economics at the University of Leicester, James completed a Master's degree in Development Economics. He then joined an accountancy firm in London and went on to qualify as a chartered accountant. James finished his career in practice as a Senior Assurance Manager at PricewaterhouseCoopers in the Middle East. He has since held various senior finance positions - mainly in SMEs but also in an AIM-listed company - in the energy, engineering and manufacturing sectors, both in the UK and Ireland. He is now a Fellow of the Institute of Chartered Accountants in England and Wales (ICAEW) and joined The Motley Fool in September 2023. James invests primarily in UK stocks through his Stocks and Shares ISA and Self-Invested Personal Pension Plan. He enjoys using his accountancy training to review annual reports and earnings releases in an attempt to identify potentially undervalued companies. He also likes dividend stocks and follows the tried and tested approach of reinvesting all of the income he earns buying more shares. His favourite investment quote comes from Warren Buffett. He once said: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks."

Published 12 April, 2023 2:00 pm BST

| More on: TSLA

Tesla‘s (NASDAQ:TSLA) stock has wobbled lately. It has fallen by 20% over the past six months. By contrast, the Nasdaq has risen 13% in the same time.

Tesla shareholders aren’t used to such a disappointing performance. Over the past five years, the electric vehicle (EV) manufacturer’s share price has soared by over 800%.

So far I’ve resisted the temptation to buy Tesla. In my view, the company’s huge market cap has never been justified given the relatively small number of cars it makes.

Scaling up

But by investing in huge new gigafactories in Germany and China, Tesla is seeking to ramp up its production. It certainly appears to be working. Earlier this month, the company revealed it had achieved record sales during the first quarter of 2023. Deliveries were 36% higher than for the same period in 2022. And over two times higher than for Q1 2021.

Deliveries	Q1 21	Q2	Q3	Q4	Q1 22	Q2	Q3	Q4	Q1 23
Model S/X	2,020	1,890	9,275	11,750	14,724	16,162	18,672	17,147	10,695
Model 3/Y	182,780	199,360	232,025	296,850	295,324	238,533	325,158	388,131	412,180
Totals	184,800	201,250	241,300	308,600	310,048	254,695	343,830	405,278	422,875

But earlier this year, Tesla announced significant price cuts across its model range. A basic Model Y now costs $54,990 compared to $65,990 a few months ago. I’m concerned that this price reduction of 17% is going to affect the company’s earnings.

Billion dollar question

Will additional deliveries offset the reduction in profit per vehicle?

The answer is crucial in determining how Tesla’s share price will react to the company’s Q1 results that will be released next week.

By looking at Tesla’s 2022 accounts, I’ve calculated that the average selling price for one of its cars was $53,143. This excludes vehicles sold on leases — the revenue from these is reflected over the period of the lease rather than on delivery.

Assuming a 15% price reduction, automotive revenue for the first quarter of 2023 will be around $18bn. Multiply this by four and sales revenue for the year should be $72bn. This is only $5bn more than for 2022.

Inflation is likely to have further eroded the margin. And I’m sure overheads will have gone up as the company is now operating in more locations than ever before.

Overall, I don’t think the higher volume of production will significantly increase its earnings. If I’m right, Tesla’s stock won’t receive the boost shareholders are hoping for.

Quantity vs quality

Despite the price cuts, Tesla’s cars are still pricey. There are many cheaper EVs available. However, consumers don’t mind paying higher prices for a product of superior quality.

But doubts have been expressed about the quality of Tesla’s vehicles. Last year, What Car found the marque ranked 19 out of 32 manufacturers for reliability. Toyota, and its luxury division, Lexus, claimed the top two spots.

All motor manufacturers include an estimate of the future cost of repairing vehicles under warranty in their accounts. At the end of 2022, Tesla had a provision of $3.5bn — equal to 5.2% of automotive revenue for the year. Toyota’s provision was equivalent to 0.6% of its sales.

I’m concerned that Tesla has yet to reach the build quality standards of its larger rivals. Because of this — and the uncertainty surrounding whether the price cuts will help the overall profitability of the business — I’m not going to invest in it. But I’ll be looking at next week’s earnings release with interest.