The year 2023 is a puzzling year for Tesla investors.
After a nightmarish start in line with 2022 in which Tesla stock fell 65%, translating to a drop in market value of about $725 billion, the company has fully rebounded on the stock market, having a spectacular performance, until the announcement of its first quarter results on Apr. 19.
Between Jan. 1 and Apr. 18, Tesla's shares have rebounded by almost 50%, giving smiles to exhausted investors who cling to the promises of a sustainable energy economy made by Elon Musk, the whimsical and charismatic Austin, TX based group CEO.
But since the announcement of the first quarter results, Tesla's stock has struggled to find a clear direction. It initially fell 11.6% after the results, and then stabilized, rising 1.3% during the last trading session. This erratic behavior is indicative of the mess Tesla fans, investors and analysts find themselves in. No one knows what to think of the carmaker and no one can really say what is going on with the company, let alone predict what is going to happen. Musk has created complete confusion for everyone. Let's unpack the situation.
Price Cuts v. Advertising
Tesla (TSLA) lowered the prices of its two most popular models -- the Model 3 sedan and the Model Y SUV -- for the second time in April. These two vehicles made up 97.5% of the 422,875 vehicles delivered by the carmaker in the first quarter. They represent 95.6% of the 440,808 vehicles produced by Tesla during the same period.
This year, the price of the base Model 3 is down by about 15% and the base Model Y is down by 29%. As a result, these models have become affordable to a greater number of potential buyers.
The tradeoff from Tesla's point of view is that it can increase market share as competitors -- EV upstarts Rivian (RIVN) and Lucid (LCID) and legacy carmakers like Ford (F) and General Motors (GM) -- struggle to make money on EVs because their production and sales volumes are still low.
But analysts are worried that the price cuts will eat into Tesla's profit margins. The question for them is therefore whether Tesla is in a weak position, which is forcing the group to carry out these price reductions.
The debate is currently agitating the car industry and Musk did not help much by suggesting that Tesla would undoubtedly continue to lower prices. In doing so, he gave the impression that the electric vehicle maker, whose customer base has thus far been affluent people making climate change a priority, wanted to reach as many consumers as possible. Venturing into new territory seems to be Musk and Tesla's new strategy.
"We've taken a view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin," Musk told analysts and investors during the earnings' call on Apr. 19.
Tesla's automotive gross margin, which excludes sales of regulatory credits to other carmakers, fell to 19.3% in the first quarter, below the 20% threshold the group targeted. Three months ago, Chief Financial Official Zach Kirkhorn had indicated that Tesla wanted a margin above 20% this year.
But some investors believe Tesla, which has no marketing budget, should advertise to help EV adoption rather than continue to lower prices.
"The expected pivot away from further price cuts toward education-based advertising, plus Cybertruck, plus the $25K compact to expand TAM to the masses, plus a very cheap valuation (30-35% LT vol growth for 32x 2024 Adj EPS) is why I remain a steadfast $TSLA bull," argued Gary Black, a Tesla investor.
'Rapid Rise'
"One could argue price cuts undermine long term pricing power and triggers price wars. These are in general legitimate concerns, but not for Tesla, who doesn’t see around even the shadow of a competitor capable of sustainably compete on prices," said NewStreet Research's analyst Pierre Ferragu on Twitter. "Bottom line: price cuts are the right thing to do today, without the shadow of a doubt, and they are highly value-creating for shareholders."
Faced with all this tumult, Musk has just sent a message to worried Tesla investors. This message boils down to "hold tight and be patient." It all started with a thread from Farzad Mesbahi, a self-described investor in Tesla, who recalls having doubts about the automotive group between 2015 and 2019, but not having changed his investment strategy. The strategy paid off since Tesla went from a carmaker who struggled to produce a vehicle for the masses - the Model 3 - to one of the biggest companies in the world in terms of market value.
"There was a 4 year period of time, between 2015 and 2019, where being a $TSLA investor was absolute hell," he said. "I used that time to retest my thesis everyday. The last few quarters, and likely following quarters, are very reminiscent of that time. Don’t be afraid to get uncomfortable."
"There have been several extended periods of flatness, followed by rapid rises to new plateaus," Musk commented.
Basically, Tesla's current market hesitation is normal. It should be followed by a meteoric rise before a new period of plateau, followed by another rise and so on. It is a cycle expected to reproduce itself, Musk seems to suggest.
He also took advantage of another comment from a fan of Tesla criticizing the carmaker's detractors, saying that experts, the media and others were wrong and continue to be wrong about his company.
"Our club exists to put out facts. When I got my first tesla I never realized how biased the media was," the user said. "I actually drove the cars that were supposedly going to start a fire and the company that was going to go bankrupt. We’ve been fighting FUD for almost 5 yrs and that won’t stop."
"This really opens your eyes," Musk commented. "If they’re this wrong about Tesla, what subjects are they actually right about?"
Musk is staying the course despite the criticism and even seems to enjoy the confusion he has caused. Only he knows what his price reduction strategy hides.
