The thinking was strategically sound: Lower your prices to make your products more competitive in an increasingly crowded market. Sometimes as a business, you just do what you have to do.
Tesla's (TSLA -1.11%) early 2023 decision to trim the sticker prices on its electric vehicles, however, has clearly had its consequences. As could have been expected, its per-car profits were initially crimped. What might have been less expected, though, is that its profits continue to be pinched despite the company having achieved a much greater scale of production.
Shareholders might want to start asking tougher questions about this EV business's math.
Price cuts vs. falling production costs
Don't freak out. Tesla's still turning a reasonably respectable profit. That's not apt to change in the foreseeable future.
But this company doesn't seem to enjoy nearly as much pricing power as it once did now that legacy automakers like Ford, General Motors, and Hyundai are knee-deep in the electric vehicle waters.
The chart below tells the tale, although there's an important preface to understand: The math used to create the chart incorporates leasing-related revenue and costs in addition to regulatory credits. The data also doesn't reflect any changes in the number of higher-priced cars Tesla makes -- like the Model X and Model S -- relative to the number of its lower-priced cars, such as the Model 3 and Model Y.
On the other hand, leasing and regulatory credits only make up a tiny fraction of Tesla's automotive top and bottom lines. And, as has been the case since early 2021, the Model 3 and Model Y still account for the overwhelming majority of the company's EV production.
In other words, the picture being painted here means what it looks like it means.
On that note, take a look. Tesla's average retail price per delivered vehicle continues to inch lower following the big year-ago cut. As of the final quarter of 2023, it stood at about $44,500 for cars that cost an average of $36,100 to manufacture. That translates to EBITDA per car of $8,160, and a net profit per car of just over $5,100. All four figures are now the lowest they've been since 2021 when they were on the way up. Per-car profitability, however, is falling much faster than sticker/sales prices are.
Data source: Tesla. Chart by author.
It's not necessarily the end of the world. This dynamic could have been predicted, in fact. It was only a matter of time before a host of other car companies joined the fray in a serious way, once Elon Musk took the idea of battery-powered vehicles mainstream.
Regardless, it's concerning that Tesla's costs to manufacture an EV aren't going down all that quickly even though production is more than 10% greater than it was a year ago, and 60% higher than it was two years back. One might expect better economies of scale even if the costs of materials and labor have risen over that two-year stretch.
Making matters even more alarming is that the company is still trimming prices even though its production costs aren't dropping. The China Passenger Car Association just reported that in February, Tesla sales fell 19% year over year to 60,635 units -- the lowest unit volume for the company in China since December 2022. Meanwhile, last month Tesla unveiled a $1,000 price reduction for certain versions of the Model Y sold in the United States.
Tesla stock is tough to own right now
None of this inherently makes Tesla un-investable. The company is still turning an automotive profit, after all. It also still has plenty of opportunities beyond the increasingly crowded EV market. As Laffer Tengler Investments CEO Nancy Tengler recently noted, Tesla's "Mega-batteries business (utility grade) could be worth $120 [billion] -- substantially more than its stand-alone car business," adding that the company says mega-batteries are "the fastest growing and most profitable TSLA business." Tengler ultimately opines: "We think this is the growth driver completely underappreciated by investors."
She concedes, however, "In the near term what will drive the stock is the narrative around EV competition and the price cuts/incentives just announced in China." Her pessimism on that front isn't apt to ease up until the trajectories on the chart above take a clear turn for the better.
That's the rub, of course. It's not clear when or even if Tesla will be able to reclaim some of its lost pricing power, just as it's not clear how or if the company will be able to meaningfully reduce production costs further.
Bottom line? Current and would-be Tesla shareholders have much to think about here. The company's showing a kind of weakness the market's never really seen from it before. It can't really afford to fight a prolonged price war as conditions stand right now. As an investor, you may be better served to pick a more promising prospect -- at least until Tesla sorts out one or both of these two challenges.
