Tesla price cuts are the 'right medicine at the right time,' analyst says

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With inventory reportedly piling up, Tesla analysts and investors predicted price cuts were coming — and they were right.

In addition to cutting prices for the Model 3 and Model Y in several European countries, Tesla cut prices for those models in a big way in the U.S., likely in the name of boosting demand and to bring these cars under the price caps for the Inflation Reduction Act’s EV tax credit.

Wedbush analyst Dan Ives said the the cuts are the “right medicine at the right time.”

In a note to clients today, Ives argued that lowering prices was the correct strategic move as demand may be waning and competition is heating up.

Starting with the Model 3, the RWD version goes from $46,990 to $43,990, a 6.4% drop. Even bigger, the Model 3 Performance goes from $62,990 to $53,990, representing a 14.3% price cut. Note that the IRA tax credit maximum price for cars like the Model 3 is $55,000.

For the popular Model Y SUV, even bigger price cuts have arrived. The Model Y Long Range goes from $65,990 to $52,990, a nearly 20% drop. The Model Y Performance goes from $69,900 to $56,990, an almost a 19% drop. Note that the Model Y in 5 seat configuration has the same $55,000 price cap.

New Tesla Model Y pricing (tesla.com)
New Tesla Model Y pricing (tesla.com) (Yahoo Finance)

The 7 seat version of the Model Y, which had qualified for the $80,000 price cap on EVs, now rises in price by $1,000.

While these prices are likely to boost volumes in Q1 tremendously, and bring more buyers from other EV brands back to Tesla, bigger concerns remain.

The IRS’s new guidance on battery components and assembly are coming in March, and will likely cut the $7,500 tax credit by some amount as automakers scramble to fulfill those requirements. This would then make the Model 3 and Model Y, as well as other competitors, more expensive, thus pulling forward demand further in Q1.

An even bigger concern is margin compression. Cutting prices from 6% all the way to nearly 20% is cutting deep into Tesla’s profit margins, which prior to these cuts was the envy of the automotive world (Tesla’s automotive gross margin was 27.9% in Q3 2022, the latest quarter).

While the stock reaction today is reflecting that margin impact, Ives said it’s the right move, long term.

“Tesla now has global scale (Austin, Berlin, further China build-out) it did not have a few years ago and has margin flexibility to make aggressive moves like this to gain further market share in this EV arms race,” he writes.

Ives says the price cuts will spur demand by 12-14% globally in 2023, as Tesla and Musk go on the “offensive” in a softening backdrop.

“This is a clear shot across the bow at European automakers and U.S. stalwarts (GM and Ford) that Tesla is not going to play nice in the sandbox with an EV price war now underway,” Ives said, as he maintains his outperform rating and $175 price target.

Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.

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