Tesla's Strategic Move: Lowering Prices for Maximum Market Penetration
Let's put $TSLA stock price aside for a moment and discuss Tesla's latest strategic move to lower prices as much as humanly possible.
Tesla is the only manufacturer on planet earth that can make EVs, profitably, at scale. Even BYD, Tesla's closest competitor in terms of scale, subsidizes its EV business with ICE and Hybrid sales, giving them razor thin margins.
The Impact on Profitability: Maintaining Growth While Lowering Prices
Tesla has now decided that it will 'potentially' forgo profitability in the short to medium term in order to sell as many cars as humanly possible, while they are GROWING. This isn't lowering prices to keep the same levels they had the year previous. It's to sell more cars year over year. For 2023, they are aiming to sell ~500,000 more cars or ~40% more year on year. This is before the ramp of their pickup in the Cybertruck, the release of their ~$25k compact car, or release of their much-rumored Van.
If we take Q1 car margins (GAAP) at 19.3% and compare them to Q4's 23.8%, this means that Tesla was able to drop prices on their cars by as much as 20% but gave up ~450 bps/4.5% of gross margin as a result. We now have clear data that says that there isn't a 1 to 1 relationship in price decreases and profitability. This is due to a myriad of reasons, like mix shift towards more profitable cars (Model Y), Berlin and Austin ramp, folks deciding to option up, lowering cost of raw materials, higher uptake of software features, new buyers that never knew Teslas were actually somewhat affordable and decided to buy at current average selling prices, etc. etc. etc.
The Importance of Affordability and Compelling Features in Tesla's Strategy
We also have continued ramp at Berlin and Austin for the rest of the year, more costs in the supply chain that need to be addressed, a ramping energy business that will add profitability to the bottom line, and in a best-case scenario (but needs to be proven), revenue at near 100% margin for Full Self Driving adoption.
This means that as Tesla 'potentially' continues to lower price on its existing line up (which I expect them to do as they increase production, especially in a weakening economy), the impact to profitability isn't going to hamper Tesla's ability to grow, meaning that they will continue to build their factories as fast as possible, increase production as fast as possible, develop and release the Cybertruck and compact car as fast as possible, ramp up their energy business as fast as possible, ramp up the Bot program as fast as possible, etc etc etc.
Tesla as a Deflationary Force: Revolutionizing the Transportation Industry
In other words - Tesla is in a financially sound position to execute on its long-term plan at the highest level, which is to inundate the world with electric vehicles that can drive themselves. This is directly aligned with Tesla's goal to reach 20,000,000 cars sold per year by the end of 2030.
And for this to happen, Tesla cars have to be a) so incredibly compelling that it will force an individual no option but HAVE to consider a Tesla vehicle under any circumstance and b) making it so incredibly affordable that not doing option a) would make you feel like you are being irresponsible when you are thinking about your transportation options.
I think it's quite clear that this is Tesla's plan. As Joe Rogan would say, they want to become 'undeniable', and the best way to do this is with amazing products at surprisingly affordable prices.
You don't get to 20m cars by 2030 with a $46k Model Y. Even at current prices, a $46k Model Y in the US with the EV tax incentive is about as affordable over 8 years as a Rav4. We shouldn't be surprised that Tesla will likely have the best-selling car by unit volume in 2023 when we think about it in this context. But the reality is that this is just the beginning. Prices will continue to come down, cheaper trims and models will be unveiled, and more efficient practices will be put in place until every person who is thinking about buying a car would be forced to consider a Tesla.
The Potential of a Mass-Market Tesla
I like to think of Tesla as a deflationary force on transportation. They've finally reached a scale in their supply chain and manufacturing where they can start to showcase their muscles in this front. How much money they make short term, and what the stock market decides to value the company based on those profits, is fully up for debate. But a transportation company that has a goal of 20m by 2030, is ramping its energy business, is solving autonomy in real time, and has the most talented workforce of arguably any company on earth (except maybe for SpaceX), is worth something.
Let me leave you with this - Tesla will likely have the best-selling car on planet earth by unit volume, period, in 2023 in its Tesla Model Y. A ~$50k USD pure electric SUV by a start-up automaker, with $0 in advertising. What happens when you can buy a Tesla for half of that, can drive itself, and everyone in the world knows about both its feature set and affordability?
The push for higher profits rather than larger production comes from Wall Street and fund managers, who only see profitability as the desired motive. When you remember that Elon Musk really wanted to take Tesla private, as he has kept SpaceX, you can understand that Elon has kept the same agenda for Tesla that he has always had, and that stockholders really get in the way of that. The prime motivation is to accelerate the worlds move to renewable energy, and cut the cord to fossil fuels.