Wall Street Stock: After Significant Price Drops – Are Tesla’s Profits at Risk?

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• Tesla cuts prices in numerous countries
• Unclear if falling prices will lead to lower profits
• Wall Street analysts divided

Price reductions as far as the eye can see

Tesla fans can be happy, because the Stromer from the house of the e-pioneer have recently become cheaper. The carmaker announced a few weeks ago that it would be offering some of its models at lower prices in the USA and Germany from now on. Depending on the configuration, customers in Germany pay up to 17 percent less for the Model 3 and the Model Y. Price reductions were also announced for the USA. Here, buyers can look forward to an additional discount from subsidies that came into force in January, which is why savings of up to 31 percent are possible for the Model Y, for example, as Reuters calculates.

However, these are only the latest announcements in a series of price cuts across numerous countries. Since October 2022, prices in South Korea, Japan, Singapore, Australia and China have been reduced. For the electric car maker, this represents a departure from its previous strategy of raising prices when demand is strong. Due to the lower prices, other electric car manufacturers could now be forced to make their Stromer cheaper, which could result in a price war.

Tesla stock responds with levies

Investors reacted coldly to the change in strategy. Tesla shares already had a difficult time in 2022 and ultimately fell 0.94 percent to $ 122.40 on the corresponding day in response to the announcement on the NASDAQ. Analysts were also divided about the price cuts. As Barron’s reports, average analyst estimates for 2023 EPS have fallen about 40 cents over the past few weeks to $5.10 per share.

Falling prices = falling profits? Not necessarily

Falling prices present a difficult task for Wall Street pundits, as it is not easy to predict how such lower prices will ultimately affect the balance sheet. For one thing, the profit generated per unit sold is declining. On the other hand, a larger sales volume could be achieved and the cost per unit could be reduced. However, what is not taken into account in these calculations are the variable costs such as raw material and energy prices.

For this reason, there are analysts who welcome the price cuts and others who expect a more negative impact on Tesla’s profits.

Variable costs in focus

One who is taking the Tesla price cuts as a positive is Future Fund Active ETF co-founder Gary Black. He believes the lower prices could have a positive impact on margins, he told Barron’s. In particular, variable costs, such as the prices for lithium and steel, have recently fallen sharply, which would cushion the price cuts at Tesla. In addition, the Wall Street connoisseur expects lower prices to have a positive impact on sales, which in turn means fixed production costs are spread across more vehicles at higher volume.

Analysts divided

Wedbush Securities analyst Dan Ives, despite the difficult prediction of Tesla earnings in 2023, insisted on making calculations and making a forecast. Barron’s says he expects Tesla’s gross profit margin to decline by three to four percentage points this year compared to what it would have been without price cuts. He estimates that worst-case 2023 EPS will be $4.50 per share. The Tesla bull remains positive about the carmaker. Wells Fargo analyst Colin Langan expects EPS of $3.80, according to Barron’s. Bernstein Research expert Toni Sacconaghi also only expects earnings per share of 3.80 US dollars for 2023. As he writes in an analysis, it is unclear whether further price reductions are planned.

Jefferies expert Philippe Houchois sees it as less of a problem. He remains optimistic, but reduced his target price from $350 to $180 in an analysis. He sees the price reductions as the e-car pioneer returning to its core, namely making e-mobility affordable and using resources efficiently. Goldman Sachs also remains confident after the price cuts. According to an analysis, analyst Mark Delaney expects lower profits but better sales development for Tesla. In addition, the e-car maker still has the opportunity to open up new revenue opportunities through software updates and other services. Still, he lowered the Tesla price target from $205 to $200.

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