3 burning questions about Tesla’s aggressive EV price cuts

The auto industry’s leading electric vehicle producer has slashed prices across its lineup of vehicles in the U.S. and several major European markets, aiming to boost sales amid an inflation-driven slump in demand. 

The price cuts in the U.S. range from 6% on its cheapest sedan (the Model 3, now $43,990) to 20% on its best-selling SUV (the Model Y, now $52,990). The move also gives U.S. buyers the chance to receive up to a $7,500 federal tax credit for purchasing Tesla’s souped-up version of the Model 3 and standard Model Y eligible. Both vehicles previously exceeded a price limit on the tax credit.

The reductions, when coupled with recent price cuts in China and other Eastern Hemisphere markets, mark a substantial concession from Tesla, which failed in 2022 to meet its self-imposed target of raising deliveries by 50% year over year. Slowing demand and rising competition have stunted sales growth and hammered Tesla’s stock, which has fallen 64% in the past 12 months. (CEO Elon Musk’s purchase of Twitter didn’t help, either.)

Tesla shares fell as much as 6% in early-morning trading Friday, though they were only down 2% by the early afternoon.

We’ll see whether these price cuts are a temporary response to an inflationary period or a new chapter in Tesla’s history. In the meantime, the changes raise three big questions that will go a long way toward defining the company’s future.

Is waning demand transitory or a sign of larger issues?

Tesla’s remarkable growth in recent years and the broader auto industry’s rush to invest in EVs, among other signs, suggest that interest in electric cars remains solid. EV sales still jumped 58% in 2022, even as global economic headwinds dented consumer budgets, according to BloombergNEF.

But Tesla, for now, is still targeting a relatively small customer base and faces growing competition in the market. To wit, only one-third of Americans would definitely get or seriously consider getting an electric vehicle right now, according to a Consumer Reports survey of roughly 8,000 U.S. adults conducted in early 2022. Charging logistics is still the biggest hurdle to EV interest, a problem that will likely take multiple years to address.

Meanwhile, global automotive rivals like Ford, General Motors, Volkswagen, and BYD are ramping up their output, investing tens of billions of dollars to scale their EV operations. 

Consumer penny-pinching still seems like the most likely culprit for Tesla’s missed delivery targets last year, but the company’s once-enormous EV edge is waning. If Tesla sales rebound well following the price cuts, it’s a sign that the Tesla brand remains strong.

Will other car companies follow suit with price cuts?

Up until a late-2022 price war broke out in China, the cost of EVs across the world was steadily rising. Soaring materials expenses, particularly for battery production, were driving sticker shock throughout the industry.

With its price cuts, Tesla is sending “a clear shot across the bow at European automakers and U.S. stalwarts,” Wedbush Securities analyst Dan Ives wrote in a client note, according to Reuters. While many of its rivals operate on comparatively thin margins, Tesla’s robust profits give it more runway to reduce prices, undercut the competition, and potentially earn some brand loyalty from new buyers.

Investors are already worried about the potential impact of Tesla’s gambit on Ford and General Motors, in particular, which saw their shares fall more than 4% in midday trading Friday.

Can Tesla make up some of the revenue difference with software?

In a Twitter Spaces conversation last month, Musk foretold today’s developments, arguing that the company is better off sacrificing some profit margin for higher unit sales. One main reason: Tesla sells semi-autonomous vehicle upgrades at a premium.

“Even if your margins are extremely low in selling the car, the subsequent upgrade to it being autonomous is a lot,” Musk said. “That’s something no other car company can do.”

Still, in the short term, that strategy requires up-selling customers already fighting inflation. Tesla’s Full-Self Driving capability costs $15,000 upfront or up to $199 per month. Not exactly chump change.

And while Musk remains exceedingly bullish on software as a sales generator for Tesla, the promise of fully autonomous vehicles continues to wane with each passing year.

“We are more skeptical on the company’s full-self driving/autonomous vehicle (AV) approach, which we view as a critical input to the overall risk/reward assessment given our positive stance on the AV opportunity as a whole,” Citi analyst Itay Michaeli wrote in a client note this month, according to Yahoo Finance.

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Jacob Carpenter

NEWSWORTHY

Cooking down his pay. Apple CEO Tim Cook is taking a significant pay cut following investor criticism of his nearly $100 million compensation package in 2022, Bloomberg reported Thursday. The longtime Apple chief’s target compensation for 2023 will total $49 million, with the vast majority awarded in company equity. Apple board members said the decision stemmed in part from “balanced shareholder feedback” and a recommendation by Cook to trim his pay.

An appeal to status quo. Lawyers for Google argued in a U.S. Supreme Court filing Thursday that the justices could “upend the internet” if they rule against the company in a landmark case set for oral arguments next month, the Wall Street Journal reported. The case tests whether digital platforms should be shielded from legal liability when they algorithmically recommend harmful content posted by third-party users. Google officials said a ruling against the tech giant could lead to widespread censorship by large platforms and the spread of dangerous content by smaller online hosts.

Winter keeps getting worse. Crypto.com announced plans Friday to reduce its workforce by 20%, becoming the latest digital assets exchange to trim its headcount, CoinDesk reported. The Singapore-based company, estimated to employ about 4,000 people, said weakness in global crypto markets spurred in part by former competitor FTX’s collapse precipitated the job cuts. Crypto.com made two rounds of layoffs in mid-2022, though both were smaller than the latest reductions.

Ganging up on Microsoft. Google and Nvidia have spoken with the Federal Trade Commission about their potential antitrust concerns related to Microsoft’s planned $68.7 billion acquisition of video game developer Activision Blizzard, Bloomberg reported Thursday. The complaints centered on Microsoft’s potential to gain an unfair competitive advantage in cloud, mobile, and subscription gaming, sources told Bloomberg. Google cloud-computing and mobile operating system businesses could be impacted by the purchase, while Nvidia leads the gaming graphics card market and runs a gaming streaming service.

FOOD FOR THOUGHT

An artificially inflated trend? Silicon Valley thrives on rampant excitement for new technology, and nothing is hotter these days than the generative A.I. space. But as Insider reported Thursday, questions still remain about the economic case for chatbots and similar tech, which are extremely costly to operate and haven’t yet produced substantial revenue. The lack of immediate sales isn’t stopping massive interest in generative A.I., including Microsoft’s reported discussions to invest up to $10 billion in sector darling OpenAI. Yet a few skeptics are watching to see whether generative A.I. turns into the industry’s next bubble following a period of enormous hype among venture capitalists and tech firms.

From the article:

Generative AI startups are already securing sky-high valuations despite little evidence of commensurate revenue, let alone profit — reminiscent of the low-interest-rate boom times that saw firms with unproven business models fetch valuations worth billions of dollars despite having little to show.

OpenAI's reported target valuation of $29 billion would be on revenues in the "tens of millions", according to the Wall Street Journal. That could mean a revenue multiple ranging from around 290x to 2,900x. OpenAI is commercially promising thanks to its tie-ups with Microsoft, but that is a big show of faith.

IN CASE YOU MISSED IT

Should A.I.-generated deepfakes be labeled? It’s the law in China now—and an expert says that we can all learn from what happens next, by Steve Mollman

Edward Jones’s CEO is steering clients away from ‘fads’ like crypto to proven investments: ‘Crypto is a little more likely to disappoint clients than it is to delight them’, by Phil Wahba

Gary Gensler throws crypto investors under the bus—again, by Jeff John Roberts

Disney and Tesla’s board seat battles are just the beginning. An SEC rule change could put more directors at risk, by Lila MacLellan

The best job in America is still in tech, and it pays $120,000 a year, by Jane Thier

President Biden is making a $700 million bet on a Nevada lithium mine as America makes green technology a ‘national priority’, by Ari Natter and Bloomberg

82% of San Francisco’s would-be jurors dislike Elon Musk with a ‘passion,’ his lawyers say, by Joel Rosenblatt

BEFORE YOU GO

Courting trouble at home. Remote work slackers and mouse jigglers, beware: Your bosses might come after you for wage theft. A Canadian accountant recently was ordered to pay nearly $2,500 in returned wages after a civil tribunal used her company’s computer tracking software to determine she overbilled for her work, Fortune’s Alice Hearing reported. The staffer’s employer, a boutique firm in British Columbia, argued that she wasted 50 hours of work time on personal activities and filed time sheets that didn’t correspond with her computer activity. Such legal cases remain exceedingly rare, though they show the potential for companies to weaponize digital tracking in the legal realm.