Tesla's China Price Cuts Were Expected, Part of Aggressive Volume Growth Target of 50% Annually, Says Wolfe

Tesla's price cuts in China were expected and other automakers in the market may follow suit, Wolfe said. The firm believes the price cuts are part of the company's strategy to further increase volumes by an average of 50% per annum.

Shares of Tesla Inc. fell by 1.49% by the close of trading on Monday after the company announced a price cut for its Model 3 and Model Y in China by about 5%. Initially, the market reacted sharply to the news and, at some point, the share price fell by about 7%, however it almost recovered by the end of trading. Nevertheless, a lot of analysts are calmly reacting to the news, as this was expected for them.

Wolfe analyst Rod Lache wrote in a note:

“We have been highlighting the possibility of price cut in China, as we’ve observed signs of slower growth for around 6 weeks now. In fact, speculation about potential price cuts on Social Media may have exacerbated this phenomenon...and we do see potential for other OEMs in China to follow suit.”

“While we can’t say that we like it” Lache continued, “this was at least predictable.” Therefore, despite Tesla's share price decline now, Wolfe believes that investors will eventually come back to TSLA as the company continues to be a driver for earnings growth. Lache wrote that periodically reducing the price of its vehicles in key markets is the company's overall strategy, which ensures growth of 50% annually. “Said simply, Tesla was always going to have to reduce prices in all their key markets to support their aggressive volume growth target of 50% avg annual growth.”

Wolfe expects margin tailwinds to continue into 2023, 2024, and 2025, with up to $8,000 per vehicle of global cost reduction, and an additional margin tailwind in North America from the Inflation Reduction Act (IRA). Its Q4/2023 EPS estimates go to $1.38/$7.00 vs $1.46/$7.13 previously.

© 2022, Eva Fox | Tesmanian. All rights reserved.

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