Tesla price cuts show realism in face of coronavirus slowdown

Tesla Model 3 are located in a Tesla service center.

Silas Stein | photo alliance | Getty Images

Tesla shares fell 4% early Wednesday but rallied at the close of the market after the company announced that it would cut the price of its cars for customers in two main markets – North America and China.

On Tuesday night, Tesla said it was cutting prices for its 3, S and X models in North America by up to 6%, and its S and X models in China by 4%. The company’s Model S sedans and sport utility vehicles (SUVs) are its oldest and most expensive vehicles, compared to its Model 3 sedan and Model Y crossover SUV.

The move shows some realism in the face of the coronavirus pandemic and the resulting spike in unemployment, which could affect demand for vehicles. IHS Markit researchers recently predicted that global vehicle sales will drop 22% this year. Tesla has not released its backlog numbers recently, and when it called its first quarter results, the company stopped promising shareholders that it “should comfortably exceed” deliveries of 500,000 cars to customers in 2020, claiming instead that it had “an installed capacity greater than 500,000”. deliveries.

Dan Ives, analyst at Wedbush Securities, said price cuts were a necessity, writing in an email to CNBC: “This is a smart strategic decision in our view given the macro environment and COVID consumers face. ” He added: “Reducing prices to further stimulate demand in the United States is possible in the short term, as the current cost structure and rising prices for FSDs give Tesla more flexibility to effect these price reductions. “

Tesla CEO Elon Musk announced earlier this month that the price of the company’s advanced driver assistance system, which Tesla markets as “FSD” or “full self-driving,” would increase in July by $ 1,000, with further increases in the future. During Tesla’s Q1 earnings call, executives also said Tesla will offer FSD as a subscription service. Musk said at the time of the subscription option, “It will probably be towards the end of this year.”

Wedbush has a neutral rating on Tesla stocks, and Ives has revised its price target upward from $ 600 to $ 800.

Craig Irwin, managing director and senior research analyst at Roth Capital Partners, saw the price cuts for Tesla’s electric vehicles as a source of increased concern. Roth Capital has a sales quote on Tesla stocks and a price target of $ 350 according to a note sent to investors following the price cuts of the vehicles.

“Reading tea leaves, it seems that Tesla is seeing a drop in demand in its main North American market,” Irwin wrote in an email to CNBC. “The most important question is whether Tesla can continue to generate growth in North America. Is it all COVID, or is market saturation playing a role? We believe market saturation is starting to play in Tesla’s North American demand. “

In his Wednesday note, Irwin cited IHS forecasts of a 22% drop in auto sales in North America this year, a trend driven by the Covid-19 pandemic.

The Tesla Model X that will transport the astronauts to the SpaceX launch pad is parked in front of the Vehicle Assembly Building at NASA’s Kennedy Space Center in Florida.

NASA

Musk focused on Wednesday on its aerospace company SpaceX, which today launched NASA astronauts Douglas Hurley and Robert Behnken on a mission to the International Space Station, marking the company’s first crew flight and a public partnership- private history for NASA.

Behnken and Hurley even got on their dashboards in a Tesla Model X.

WATCH: Elon Musk and Jay Leno take a ride in the Cybertruck

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