The Jury’s Still Out With Tesla’s Price Cut Gambit

At the start of 2023, sentiment for Tesla (NASDAQ:TSLA) shifted from bearish back to bullish. This resulted in TSLA stock zooming back from the low-$100s, back to the low-$200s in a matter of weeks.

Throughout February and March, Tesla held on to the bulk of these gains. This was in contrast to other electric vehicle plays, which also kicked off the new year strongly, only to cough back these gains, and then some.

However, after the company’s latest quarterly earnings release on April 19, it appears as if negative sentiment is accelerating. After initially being bullish about the company’s initiation of an EV price war, the market is now having second thoughts.

With this, let’s take a closer look at the changing situation with Tesla. Based on the details, further declines may be in the cards.

Why TSLA Stock Tanked After Earnings

It’s not as if investors have gone from extremely bullish to extremely bearish on Tesla in a matter of days. Starting in March, after the company’s disappointing investor day presentation, the market shifted towards more of a “on the fence” view on the EV maker’s shares.

This resulted in choppy price action for TSLA stock. Macro and company-specific worries would put pressure on shares, only for them to bounce back on more positive developments, such as the company’s better-than-expected quarterly delivery numbers.

Yet following the aforementioned earnings release, the market’s view may be shifting from “on the fence” to leaning bearish.

For the quarter ending March 31, 2023, Tesla reported a 24% year-over-year jump in revenue, but this came slightly short of the sell-side’s forecasts. Of greater concern to investors, Tesla’s gross margins came in below expectations.

Earnings per share (or EPS) came in line with expectations. However, EPS of 73 cents per share represented a 23% decline compared to the prior year’s quarter.

Shares fell by nearly 10% following an earnings report that raised concerns that the price cutting strategy hasn’t moved demand as expected.

The Situation May Worsen from Here

I can see why some investors may want to “buy the dip” with TSLA stock after its post-earnings slide.

While the latest quarterly results have elicited a strong negative reaction, there may be some silver linings, based upon commentary provided by CEO Elon Musk on the quarterly earnings call.

On the call, Musk attempted to assuage concerns about falling margins. Mainly, by arguing that a higher-volume, lower-margin strategy can still prevail.

In his view, Tesla can make up for lower margins on initial vehicle sales, with the sale of high-margin add-on upgrades like full self-driving capabilities.

But while perhaps a valid counterargument, it should be noted that other efforts to make up for lower vehicle margins, such as lower production costs, remain a work in progress.

That’s not all.

Even as it’s clear from the reported revenue growth that price cuts have helped to increase demand for Tesla vehicles, it’s unclear how effective this strategy will be in the quarters ahead.

The initial boost from price cuts, not to mention the new U.S. EV tax credit, could continue to wear off. Coupled with the growing chances of a recession, even worse quarterly results may lie ahead.

The Verdict

It’s tough to make the argument today that Tesla’s price-cut gambit is helping boost demand without hurting profitability.

Based on the latest financials, it’s clear that these cuts are hurting the bottom line.

I’m not the only one coming to this downbeat conclusion from earnings. Besides the overall market, even EV news publications typically in awe of Tesla admit that the company is in a tough spot right now.

While still priced like a tech stock, Tesla is obviously not immune to the cyclicality and competitive pressures inherent with the automotive space. Investors are once again realizing this and shifting sentiment back toward bearish.

TSLA stock will probably stay on a downward trajectory, making now not an ideal time to enter a position.

TSLA stock earns a C rating in Portfolio Grader.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.