Can Tesla Make Money on Discounted Cars? Yes.

By Douglas A. McIntyre Published Apr 22, 6:40AM EDT

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Can Tesla Make Money on Discounted Cars? Yes. — © Brandon Bell / Getty Images News via Getty Images

News is that Tesla Inc. (NASDAQ: TSLA | TSLA Price Prediction) 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?

Tesla does what it must to keep market share.

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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About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.