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Tesla Slashes Vehicle Prices: Here's What Investors Should Know

By Daniel Sparks – May 28, 2020 at 7:31AM

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Is this good, bad, or neutral news for the electric-car maker's shareholders?

In a surprise move, electric-car maker Tesla (TSLA 0.25%) cut the prices of some of vehicles by as much as 6% this week. While investors can't know for sure exactly what spurred the decision for the price decrease, it almost certainly reflected an effort to increase demand for its vehicles. What's unclear, however, is if this demand lever was pulled because of a decrease in vehicle orders or because of improving production rates. Further, it's possible that price cuts also reflected improved manufacturing costs.

Here's a closer look at which Tesla vehicles saw price cuts and what it might mean for the electric-car maker's business.

Model 3

Model 3. Image source: Tesla.

Price reductions: a breakdown

Here's how the starting prices of three of Tesla's vehicles changed.

  • Model 3 price dropped by $2,000 to $37,990
  • Model S price was slashed by $5,000 to $74,990
  • Model X price also declined by $5,000 to $79,990

The starting prices of two other Tesla vehicles, however, remain unchanged. The base price of the China-made Model 3 (for the China market) stayed at 272,000 yuan.  Further, Tesla's new Model Y, which is still supply constrained based on an estimated delivery window for new orders on the company's website of eight to 12 weeks, still starts at $52,990.

Good news or bad news?

On the surface, any price decrease in the auto industry looks like bad news. But investors should keep in mind that Tesla is in a very unique position compared to other automakers.

The company's total vehicle sales are growing rapidly, mainly due to soaring Model 3 deliveries. Trailing-12-month Model 3 shipments for the period ended March 31 increased about 70% year over year. While the vehicle's year-over-year growth will likely stall in Q2 due to a manufacturing pause during the quarter because of COVID-19, Tesla may be realizing cost-savings benefits that come from improved economies of scale toward the end of the period now that manufacturing has resumed.

Vehicle production at Tesla's factory in California.

Image source: The Motley Fool.

Of course, if demand was handily exceeding supply, Tesla likely wouldn't cut prices in the first place. So, the company must be either approaching supply and demand equilibrium or even be facing a demand shortage relative to production capabilities in order for the automaker to reduce prices. However, any demand weakness is unlikely to be significant given the fact that Tesla said it ended its first-quarter with its highest-ever vehicle order backlog. This implied that any early negative impact from COVID-19 on vehicle demand wasn't enough to slow down demand growth at the time.

Investors will get a better idea of how demand is faring when Tesla reports its second-quarter vehicle deliveries sometime between Jul. 1 and Jul. 3. But even this update may not provide the full picture, as Tesla was likely supply-constrained for much of Q2 due to its temporary factory shutdown. The first clear window investors may get into Tesla's demand story since COVID-19 has rattled the economy, therefore, may be the company's second-quarter earnings release, which doesn't typically take place until late July. 

Overall, it's too early to know whether price cuts are good news or bad news for Tesla investors. But the truth could also lie somewhere in the middle.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

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