Tesla (NASDAQ: TSLA) is the global leader in electric vehicle (EV) production and sales. Not only have its cars set the technological standard for the industry, but so have the manufacturing processes inside its gigafactories.
As a result, the company makes EVs at a higher gross profit margin than any of its competitors. But amid the difficult economic climate, Tesla has slashed prices across its fleet to spur demand, which sent its margins lower in the first quarter of 2023.
Tesla stock reacted negatively to financial results released on April 19, and it closed the month with a 15% loss. Along with the sell-off in the broader technology sector last year, the stock is now down 60% from its all-time high. Here’s why that’s a long-term opportunity.
Facing a short-term demand problem
Consumers around the world have been grappling with soaring inflation and rising interest rates for the last 18 months. As a result, many big-ticket items are being cut from household budgets, and electric vehicles might be among them.
According to a survey conducted earlier this year by the Associated Press with the Energy Policy Institute at the University of Chicago, 47% of Americans are unlikely to buy an EV as their next car. In fact, just 19% of the 5,408 respondents said they were very or extremely likely to go electric the next time they’re in the market for a vehicle.
A whopping 83% of the people who were unlikely to buy an EV said cost was a factor. With that in mind, it’s perhaps no surprise that Tesla has cut prices six times so far in 2023, which sent its gross profit margin down to 19.3% in Q1, from 29.1% in the year-ago period. That also impacted the company’s bottom line, with its earnings per share shrinking 21% year over year.
But since the company is the only profitable manufacturer of EVs, it can afford to put some pressure on its competitors by lowering prices. That comes at an important time, because legacy automakers like Ford and General Motors are ramping up production of their EV models, and a host of start-ups in the industry are also growing quickly. As consumers are given more choices, demand for Tesla’s vehicles could also be potentially diluted.