Daily Digest:
w/c 24th June - a relatively light data week, with spotlight on US GDP and Durable Goods Wednesday, then the Fed’s preferred inflation measure, the MoM and YoY PCE data on Friday

Tesla’s Price Cuts – Competition or Greater Efficiency, Which Matters

Intermediate

Ahead of Tesla’s (NASDAQ: TSLA) results on April 19th we need to be considering the implications of the other part of that announcement. The numbers of cars being produced and sold and then the increase in inventory that basic math then gives us. Or, alternatively, we can look at this point the other way around. Tesla has just cut prices again, the third time in recent months. Is this because of some weakness in the market, greater competition or some gain in efficiency?

Tesla’s production numbers rose, so did inventory

This does matter. When those production numbers first came out Tesla stock rose by several percent. Production is up, sales are up, everything is seemingly going to plan. Then further consideration set in – as is so often the case the first response to a corporate announcement is not the considered one – and Tesla fell. Headlines of swelling inventories began to dominate.  When looking at the actual inventory numbers they are up, a bit, but not that much. It’s also true that rising sales should lead to rising inventories. There always is more material in a wider pipeline, obviously.

What matters, perhaps, is inventory as a percentage of sales, not inventory numbers themselves.

tesla

On the other hand, we’ve these third recent price cuts. As much as $5,000 off some US Tesla models. Maybe it’s rising interest rates to blame? At which point, one little tip about writings on the stock market. If there are many different reasons being given for an event having happened, it means no commentator actually knows. People are attaching a story to the event, not giving us the reason for the event. Disappointing, yes, but that is the way this sector of journalism works. As no one knows and is just attaching a likely story then it’s a reasonable bet that no one’s right too.

Back to the beginning on Tesla’s strategy

At which point perhaps we should go back to the beginning. For that April 19th event which will reveal full financial results will be a price mover. If we can get on the right side of that then we’ve a very good trading position. The beginning is that we should note that Elon Musk does in fact have an ambition. That Master Plan Part 3 shows that. Matters are therefore not going to be dealt with on a short-term time scale. Clearly, if Tesla simply stopped investing now then it would be wildly profitable for a few years. But that’s not part of the Musk ambition so isn’t going to happen.

So, we can expect Musk to be strategic, not tactical, about TSLA pricing. If, that is, he’s got the room to be strategic about pricing. At which point we can view the pricing issue.

Competition in the EV business

Competition is hotting up in EVs, Ford is willing to lose $3 billion this year, VW is pivoting, even people like Mullin are able to sell vehicles. So, Tesla wants to keep ahead of that pack. This therefore gives us a possible explanation for those price cuts. Perhaps manufacturing efficiency has risen a bit – this does happen, extant production lines do just get more efficient over time – meaning that prices can be cut while maintaining margins. Or, the lithium price (measure by the China spot) is down some 40% from the peaks of the autumn. The cost of lithium in the batteries is a significant contributor to Tesla prices, so pass on that price saving – while still maintaining margins? Either of these and other similar explanations would be positive for the TSLA stock price if they turn out to be true.

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Musk is able to steal a march on the competition by reducing Tesla prices while they’re still struggling with manufacturing efficiency – excellent and this maintains TSLA margins while doing so.

On the other hand, those rising inventories might be the real problem. That sales performance is falling behind manufacturing volume and therefore unsold cars are building up in stock. Prices have to be cut to move them with a cost to margins. 

So, with TSLA results arriving, which way to go?

Of course, at this point we don’t know which of these two stories is true. They are both simply stories as well. The difference here is that we’re not claiming either is true, we’re trying to look at the implications of which is true.

In one story the Tesla price rises on those annual results – there will be a trading update to accompany it no doubt – and n the other it will likely fall again. So, if we want to take a position in Tesla ahead of the annual results that’s what we’ve got to decide. Which of those two stories do we believe to be true and thus which way is TSLA going to go on April 19th?

Editor

Tim Worstall is a freelance journalist who also used to be the world's leading scandium wholesalers (one of the rare earths). His Wikipedia entry gives a flavour.

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