Tesla strategic move could test Musk's market-share focus

Elon Musk has said he's willing to sacrifice profit margins for market share. He may be losing both.

Jan 17, 2024 - 19:30

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Tesla strategic move could test Musk's market-share focus

Updated at 8:52 AM EST

Tesla (TSLA) - Get Free Report shares moved lower again Wednesday, extending their January decline to around $90 billion, after the electric-vehicle producer unveiled its second round of price cuts in as many days, a move that could further pressure profit margins.

Tesla, which is losing its lead as the top EV maker in key markets in Europe and Asia, said it would lower the prices of Model Y Long Range and Model Y Performance SUVs in Germany by around 5,000 euros ($5,440), or around 8.5%. The group set a smaller reduction for the rear-wheel-drive version.

The moves follow both a surprise suspension of production at Tesla's new Berlin gigafactory, which Tesla confirmed last week, as well as a series of EV-price cuts in China, the world's biggest electric-vehicle market.

Tesla said it would shutter operations from Jan. 29 to Feb. 11 as key components from shipments through the Red Sea, which feeds into the Suez Canal, remain targets of Houthi rebels in Yemen.

Tesla's facing China headwinds

In China Tesla sold 82,432 vehicles last month, up 14.3% from October but down nearly 18% from the year-earlier period. That's the biggest annual decline since last December, according to data from the China Passenger Car Association.

Sales from BYD (BYDDY) - Get Free Report, meanwhile, were up 31% from a year earlier to a record 301,378 units as Tesla's China-based rival continues to win market share thanks in part to its partnership with Mercedes-Benz.

Tesla shares were marked 2.7% lower in premarket trading to indicate an opening-bell price of $214.08 each. The stock has fallen around 13% so far this year and lost more than $232 billion in market value since hitting an all-time high of just under $300 in July.

Short interest — measuring bets that a stock will decline in price — in Tesla remains elevated at the highest levels in the world. Investors have placed bets against the group of around $18.63 billion, or 3.03% of the stock's entire float, according to recent data from S3 partners.

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Tesla's recent price cuts are also likely to reignite debate around the carmaker's narrowing profit margins ahead of its fourth-quarter earnings on Jan. 24. CEO Elon Musk has said he's willing to sacrifice margins — earning less on each vehicle sale — in order to grow market share in major economies such as Germany and China.

"I just can't emphasize again how important cost is — it's not an optional thing for most people. It is a necessary thing," Musk told investors in October. "We have to make our cars more affordable that people can buy it."

But price cuts eat into profits, and Tesla's third-quarter earnings showed Tesla's adjusted automotive margins were 16.1%, Tesla said. That's sharply narrowed from the 18.7% figure recorded over the first quarter and 23.2% in the second quarter.

Q3 gross margins were 17.9%, narrowed from 25.1% in the year-earlier third quarter and the 18.2% figure recorded for the second quarter. Wall Street forecasts hovered between 17.8% and 18.2%.

Tesla did, however, deliver a record 484,507 new cars over the three months ended in December, a near 20% gain from the year-earlier period.

The full-year tally was marked at 1.81 million cars, rising 38% from a year earlier and topping the group's official forecast of 1.8 million but falling shy of CEO Musk's target of 2 million.