Tesla’s Margin Massacre: How Price Cuts and Competition Could Spell Doom for TSLA

Stocks to sell

Tesla (NASDAQ:TSLA) stock has continued to get hammered in 2024, with the stock down more than 25% this year alone. This move, in line with outperformance from the company’s peers, has led TSLA stock to drop out of the top 10 most valuable companies list on the S&P 500 for the first time in a long time.

There are many reasons for this decline. However, most investors are pointing to reduced margins from recent aggressive price cuts (to spur waning demand), competition from global EV makers (particularly those out of China), and a CEO whose previous antics have turned off a significant portion of the company’s buyer base.

Of course, TSLA stock has skyrocketed 16,000% since its inception, a historic success. But the company faces new mountains to conquer as competitors enter the electric vehicle market. Tesla’s initial success in penetrating wealthier markets has led to saturation. Will  Tesla be successful in strategically shifting its focus towards targeting middle-income markets?

Let’s dive into why I don’t think that will be the case, and TSLA stock remains a sell.

Suffering China Sales

Tesla shares dived 7% plus change because of a 19% drop in February sales in China, likely because of the Lunar New Year holiday. This setback damaged prospects for worldwide distribution, heightened competition, and declining demand. 

Over half of all global deliveries and 60,365 vehicle sales were made in China, causing a ripple in Tesla’s Shanghai factory output. At a 24% decline since last year’s outset, at $188.14, Tesla’s stock closed.

In February, TSLA stock responded to the intensifying competition by slashing prices and giving away incentives. Analyst Dan Ives noted this, which prompted Tesla to introduce insurance subsidies. Meanwhile, BYD fueled the fire with lower-priced models in the face of a 37% decline.

Across the ocean, Tesla offered free supercharging miles and discounted Model Y cars in the U.S.

Germany is Not Too Happy About Tesla

Tesla CEO Elon Musk took issue with the company’s European Gigafactory near Berlin after it ceased operations over what appeared to be an arson attempt. Even though the fire didn’t reach the factory, the production stopped early the following week. This stop delayed the production of vehicles, causing the company to bleed money. Emergency services were able to contain the blaze and restore power to surrounding areas.

The state’s economics minister, Joerg Steinbach, denounced the attack on Tesla’s Brandenburg facility, labeling it “terrorist” and affecting tens of thousands. With 12,500 workers, the location was evacuated. Local media purportedly released a letter from a far-left activist group, which Musk tore into.

He called the decision to stop producing electric vehicles in favor of fossil fuel vehicles “extremely dumb.” This setback comes from Tesla’s recent European difficulties because of supply shortages and union pressure. In the face of economic woes, Germany is looking for international investments.

TSLA Stock Is a No-Go

Tesla’s price reduction strategy has been in motion since late 2022. It aimed to boost production but resulted in a 10% gross margin decline. It affected profitability per vehicle and overall earnings, as manufacturing price wars usually lead to oversupply and the dreaded potential for long-term damage.

Due to hopes of copying Tesla’s 25% gross margin–achieved for a bit during the pandemic–many EV stocks saw substantial price increases. But Tesla’s declining margins indicate demand limitations. This hints at a broader decline in the EV market, with Tesla’s action warning of potential difficulties for smaller manufacturers.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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