News is that Tesla Inc. (NASDAQ: TSLA) has cut the prices of most of its models in the United States, Germany, and China. Almost certainly, the intent is for people to pick a Tesla over electric vehicle (EV) competition, or to get people on the sidelines and not buying EVs to enter the market. For Tesla investors, a question is whether the company can make money on these discounted cars with price cuts of $2,000. The answer is almost certainly yes.
Evidence suggests that sales of EVs have dived. That is unexpected. EV adoption was supposed to grow unchecked as people looked for alternatives to fossil-fuel-powered cars and high gas prices. American and German carmakers pulled back as this pattern did not hold. Price wars started, often led by Tesla.
Are Price Cuts Necessary?
One of the most expensive features of a Tesla is its Full Self-Driving mode. This allows drivers to drive with minimal effort. Some people worry about its safety, and there have been accidents. Tesla does warn that people cannot let this software drive their cars unassisted. The discount on this so-called self-driving feature is now to $8,000, down from $12,000. Presumably, since it is a software download, it is highly profitable for Tesla. (Check out The Most High-Tech and Low-Tech Car Brands: Every Major Brand Ranked.)
The company had an EBITDA margin of 15.7% in the most recently reported quarter, on automotive revenue of $21.6 billion. In the previous quarter, that number was 16.1%. For the two quarters before that, it was slightly over 18%. These price cuts are about 3% of the average sticker price of its cars. And, the margin on software could be as high as 90%, if its numbers are similar to most software that does not need major modification.
Could Tesla’s margin drop to 12%? Possibly. However, since almost all car companies outside China lose huge amounts on every EV they sell, Tesla’s numbers are still strong. The discounts are what Tesla has to do to keep market share. Over time, that may be the most important part of its operations financially.
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