On the surface, the move seems to hint at weakness. Electric vehicle maker Tesla (TSLA 4.96%) has been able to charge premium prices for its cars since the company's inception. But the price cuts of between 6% and 20% -- depending on the model -- the company introduced in mid-January suggest this pricing power is finally fading. Blame the tepid economy, competition, or a combination of both.
Largely being overlooked by critics of the move, however, is that Tesla can afford these discounts. In fact, it can really, really afford them.
Plenty of profitability
Investors keeping close tabs on Tesla may be familiar with the chart below, which comes from its fourth-quarter earnings presentation. Simply put, even though the average selling price of Tesla's cars has fallen from more than $100,000 back in 2017 to a little over $50,000 now (reflecting the debut of the lower-cost Model 3 and then the even-cheaper Model Y), the profit margins on its operation have improved over time. This is how it should be. Greater scale should improve operating efficiency on a per-unit basis.
Image source: Tesla Inc.
The graphic above, however, understates the growth of the company's per-vehicle profit -- by a country mile.
It's not a metric Tesla publishes in any of its filings or reports. It requires a bit of data collection and number-crunching to find the figures. It's there for any investment sleuths who really want to know, though. That is, Tesla is currently making more money per delivered vehicle than it was back in 2017 when the average selling price for its EVs was nearly twice what it is now. The average EBITDA per car stands at just above $14,600 for 2022, versus a little over $9,200 back in 2018. The company's net profit per delivered vehicle now is almost $10,800, compared to a loss of more than $900 in 2018. In fact, with the exception of 2018's gross profits, last year's per-car profits -- no matter how you measure them -- were all record-breakers.
Data source: Delivery data from Tesla. Profitability data from Thomson Reuters. Chart by author.
A disclaimer of sorts is required here: The math above is based on companywide fiscal data, which includes more than just electric vehicles. Tesla also owns a solar panel and energy storage business. Those segments' effects overall are negligible, however. That portion only accounts for about 5% of the company's sales, and it's basically breaking even. The bulk of Tesla's business is automotive.
More bullish than not
It remains to be seen exactly how much of an impact the recently announced price cuts will have on Tesla's bottom line. But it can afford them. Indeed, given how cost-effectively the organization has scaled up already, it wouldn't be surprising to see further growth of the company's profit margins offset the bulk of the impact of these discounts.
To this end, CEO Elon Musk says he expects Tesla to produce around 1.8 million electric vehicles this year, up 37% from last year's 1.31 million. The analyst community is confident this expansion will eventually lead to net-positive profit growth too. They're modeling per-share earnings of $5.61 next year, up 37% from this year's stagnant projection of $4.09 -- a forecast that reflects continued increases in the company's materials costs.
The bottom line is, Tesla can handle the price cuts that are seemingly part of a budding price war with EV rivals like Ford Motor Company and General Motors. That's a war Tesla can handily win, in fact, by making the premier brand in the business a bit more affordable to the average consumer.
Tesla investors have much to celebrate here.
