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Is Tesla (TSLA) facing a demand problem? Not according to Tesla.
But, if there is no demand problem, why has Tesla regularly cut prices for its electric vehicle range since the beginning of 2019? Well, according to Tesla, these are not price cuts at all, they are simply price adjustments. Yet, what Tesla calls a price reduction or a price adjustment, the result was the same when the company announced a profit for the first quarter of 2019: a penalizing loss resulting from the considerable reduction in margins.
Unfortunately for Tesla – and its vaunted valorization – word games can not change the fundamental economic reality of a situation. The hard reality is that declining margins are here to stay, which augurs badly for Tesla's financial survival.
A series of unfortunate adjustments
Tesla began reducing its prices as early as 2019. On January 2, the prices of models 3, S and X were reduced by $ 2,000. A series of additional price reductions followed in the coming weeks.
Price declines did not stop in the first quarter. Indeed, on May 21, Tesla announced its latest round of price reductions, further reducing the base prices of the model and the X model.
These cuts appear to be the result of an effort to meet growing demand, a problem that Tesla has firmly and systematically denied. But the signs are clear to see. A sharp drop in sequential shipments in the first quarter certainly sounded the alarm among analysts fearing that demand would start to decline even after the price declines.
Narrative Games
When calling the first quarter 2019 results in April, analysts repeatedly insisted on Chief Executive Officer Elon Musk about the application. Colin Langan of UBS had a particularly enlightening exchange with Tesla's boss:
Colin Langan – UBS – Analyst
Oh great. Thank you for taking my question. The tone of the call seems to indicate that some products do not face a demand problem. But margins seem to be under pressure and automakers generally stop setting their prices in case of demand problems. So what is the logic of price declines in the quarter?
Elon R. Musk – Chief Executive Officer
I mean, our goal, as we have been very clear from the beginning of the company, is to make our cars as affordable as possible.
In Musk's story, the price reductions announced during the quarter were not intended to move the metal, but only to make Tesla vehicles available to a larger market. Similarly, cost efficiencies related to volume production and increased efficiency allow Tesla to periodically adjust prices downward, thereby saving buyers money. In other words, the demand was not at the origin of the price reductions, it was the generosity of Tesla.
Affordable, but for whom?
This is far from being a new material with regard to Musk. Indeed, his comments at the Q4 2018 results call in February showed a similar reasoning:
"The demand for Model 3 is incredibly high. The inhibitor is affordability. It's as if people literally did not have the money to buy the car. It has nothing to do with desire. If the car can be made more affordable, the demand is extraordinary. "
Musk wants us to believe that the loss of Tesla in the first quarter was a consequence of his goal to make his cars as affordable as possible. But is it even quite plausible that Musk, who last year guided for all-round profits, allows his company to suffer a loss of $ 700 million because of a sense of charity and fair play? Not hardly.
There is no doubt that Tesla has made its vehicles more affordable for buyers by reducing prices in all areas. Unfortunately, this resulted in Tesla selling cars with a huge loss. It's certainly not affordable – for Tesla, anyway.
Investor's point of view
Lower average selling prices can certainly increase the demand and volume of deliveries, but they can only be taken up to now. Tesla has clearly exceeded the break-even point in terms of price. Tesla pulling all the levers possible to increase the volume of delivery in June, including the promises new bonuses sellers and deliverymen and extend free overfeeding to inventory buyers.
Investors who continue to believe that Tesla's price cuts are just adjustments to transfer savings to consumers are not paying attention. Since the third quarter of 2018, average selling prices have trended downward and the second quarter was no exception.
They will wake up suddenly when Tesla registers another defeat for the second quarter.
Disclosure: I am / we are TSLA short. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose shares are mentioned in this article.
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