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Another Price Cut on Tesla Vehicles Set to Squeeze Profitability

Elon Musk’s EV giant has once again cut its retail prices a few days ago to consumers in its largest marketplace, the US. According to the company, Tesla reduced the cost of both of its Model 3 sedans by $1,000 and its Model Y crossover by another $2,000. In addition, a $5,000 price reduction was made to both of its more costly Model S and Model X cars.

Since the beginning of this year, after 5 such adjustments, Tesla has reduced the sticker price of its basic Model 3 by a total of 11%, while also offering a 20% discount on its base Model Y.

With its first quarter earnings to be reported on the 19th April, how will these discounts affect the company’s performance and profitability? Is Tesla still a good buy for investors? We’ll take a look below at some of the key factors at play.

Tesla Daily Chart – Source: ActivTrades online trading platform (ActivTrader) and its market sentiment indicator
Tesla Daily Chart – Source: ActivTrades online trading platform (ActivTrader) and its market sentiment indicator

New Tax Credit Regulations Coming Soon

Tesla has been cautioning for a few months already that the $7,500 tax credit offered for its basic, rear-wheel drive Model 3 would be reduced due to the stricter U.S. regulations starting from the 18th of April this year. It’s hoped this new discount will boost demand despite this new reduction in government incentives.

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At the end of last month in the U.S, the Treasury Department announced new, more stringent tax regulations for electric vehicles, which would cut or eliminate tax credits on select zero-emission cars but give potential buyers another two more weeks to make their last purchases.

The new regulations are part of President Joe Biden’s initiative to have 50% of new vehicle sales in the United States be EVs or plug-in hybrids by 2030 and are intended to wean the US off its reliance on China for EV battery supply chains.

Manufacturers’ EV sales quotas were abolished by the $430 billion Inflation Reduction Act (IRA), which Biden signed in August, but new restrictions were placed on EV credits. These included a need for North American assembly beginning in August, pricing and buyer income eligibility limitations beginning in January, and now the battery and essential minerals sourcing regulations beginning on April 18th.

Vehicle Deliveries Trending Up, Margins Trending Down

Tesla reported record quarterly car deliveries on the 2nd of April ahead of this month’s earnings report, but the quarter-on-quarter sales growth of 4% was pretty average despite the price reductions. This was due in part to increased competition from other companies from the US and China, as well as what most economists would agree to be a grim economic outlook.

In the brief statement released by the company, it gave an overview of the first three months of this year, where Tesla was able to deliver 422,875 vehicles, which is a 36% increase over the previous year’s total.

Musk predicted back in January that the company may produce 2 million vehicles throughout 2023, which would be an increase of over 50% from the previous year. The expenses of increasing battery manufacturing and opening additional plants in Berlin and Texas, as well as rising raw material, commodity, logistics, and warranty costs, all contributed to Tesla’s automotive gross margins falling to a two-year low of 25.9% in the fourth quarter of 2022.

Musk Aims to Cut Production Costs in Half but Hasn’t Revealed When

Back in early March at Musk’s Investor Day, Musk and his team mentioned halving assembly costs in the next car generations, but they didn’t specify when the much-anticipated, reasonably priced electric vehicle will make its appearance.

More than a dozen Tesla officials, headed by Musk, highlighted everything from the company’s creativity in managing its operations from production to service to a white-paper strategy for the world to adopt renewable energy, but investors at the time felt the presentation was frustratingly lacking in specifics.

Upcoming Earnings

According to IBES statistics compiled by Refinitiv, quarterly revenue of $24.32 billion came in higher than analysts’ average expectation of $24.16 billion for the three months ending December 31st. The company also benefited from $1.78 billion in regulatory credits that contributed 21% to Tesla’s full-year profitability. The company also announced profits of $1.19 per share for their most recent quarter, which was above the $1.09 per share Zacks Consensus Estimate and a 9.17% positive earnings surprise.

On April 19th, 2023, the popular researcher, Zacks, also anticipates the firm will announce profits of $0.85 per share, which would represent a 20.56% year-over-year decline, for first-quarter earnings.

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This article was originally posted on FX Empire

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