Electric vehicles are becoming more popular among buyers, and for most, Tesla will be the obvious first name to come to mind on the subject. And while recent price cuts may cause some concern for bearish investors, others think that they could help woo buyers and prove Tesla’s competitive advantage.
Above: A Tesla Model 3's interior. (Image: Bram Van Oost / Unsplash)
Tesla’s price cuts may actually prove the company’s competitive advantage, rather than losing its pricing power — at least according to The Motley Fool’s Dan Caplinger. The claim comes amidst many critics pointing to weakening demand for Tesla’s EVs in the U.S. and European markets, though there could be more to the story per Caplinger’s point of view.
The announcement of the Model 3 and Model Y price cuts initially resulted in a sharp drop in price for Tesla’s shares, causing even more concerns for bearish Tesla investors. In addition to the U.S. and European markets, Tesla also cut prices in China, South Korea, Japan and Australia, and some investors have since begun asking if this was a particularly unusual decline.
Still, Tesla’s increased production capacity could play a role in future growth and bullish investors and analysts think the declines are consistent with the automaker’s long-term strategy. One such bullish analyst includes Caplinger, who is quick to note that the added efficiency of new and coming Gigafactories will soon benefit Tesla in an increasingly competitive industry.
“As production capacity has increased, Tesla arguably should be able to reap efficiencies of scale that make it more competitive against rivals,” Caplinger wrote. “Indeed, Tesla pointed to moderating cost inflation as one factor in the price cuts. Passing on the impact of lower expenses to customers is a common way for an industry leader to demonstrate a competitive advantage.”
Tesla primarily cited moderating cost inflation as a factor to the price cuts, though it could also be related to the recently enacted tax credit update. Some of Tesla’s Model 3 and Y units were previously ineligible for the federal EV tax credit, worth $7,500, due to being priced out of the eligible range. With the recent price cuts, some of Tesla’s Model Y units have gained eligibility.
It’s impossible to predict what may happen to Tesla’s stock, but the news comes as increasing competition enters the still-niche EV market. Legacy automakers are beginning to ramp up their construction plans for EV and battery production, and Tesla will be likely to face a shifting automotive landscape in the coming years.
Source: The Motley Fool