Tesla's China Price Cuts Spark Stock Plunge Over Margin Worries — But Analysts Say It's Actually A 'Smart Move'

Analysts largely welcomed Tesla Inc.’s (NASDAQ: TSLA) decision to cut vehicle prices yet again in China. The company’s updated pricing on its China website showed the reductions range between 5.7% and 13.5%.

Tesla’s Margins Resilient: Pierre Ferragu of New Street Research pointed to his analysis that showed the EV maker can afford to lower its average selling price by 8% without denting margins.

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The price reduction can help the company increase the addressable market by 50%. In the event of a recession, demand falls by 10-15% as auto demand is very elastic, Ferragu said.

Tesla can still grow units by 36%, out of an addressable market growing by 50%, he added.

Giving reasons as to why Tesla's margins may not be hurt even with a material reduction in ASP, Ferragu noted that the ramp of Berlin and Austin will improve unit costs. And the end of shipping from China to Europe will improve supply and input costs, he added. Additionally, the company will benefit from EV subsidies in the U.S., Ferragu said.

A Reason To Buy: Tesla has given Chinese customers a reason to go and buy one of its vehicles, Ross Gerber, cofounder of Gerber Kawasaki Wealth and Investment Management, said. 

The price cuts, according to the fund manager, will help compete with many cheap Chinese EVs. “Smart move as costs are declining now and covid has seriously dented the Chinese economy,” Gerber added.

Necessary Step To Stem Market Share Loss: Future Fund's Gary Black said the price cuts are needed to stop market share losses. This will lead to another round of earnings cuts for the 2023-2026 period, he said.

The price cuts, according to the fund manager, intensify the need for Tesla to accelerate the development of a $25,000-$30,000  compact as a long-term China solution to combat BYD Manufacturing Company Limited's (OTC: BYDDY) (OTC: BYDDF) huge success in the country's under 200,000 yuan ($29,148) segment.

"The price cuts will act as a band aid until a $25K-$30K compact is ready," Black added.

Meanwhile, Grace Tao, VP of Tesla China, said the company sticks to the principles of cost pricing and the latest pricing action was in response to the Chinese government's call to promote economic development and unlock consumer potential, reported CnEVPost.

Price Action: In premarket trading on Friday. Tesla shares were down 6.32%, to $103.36, according to Benzinga Pro data.

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