15 October 2020 20:32
Text size Tesla is cutting the price of its Model S sedan again. The new base price, according to a tweet by Elon Musk, is $69,420. Tesla (ticker: TSLA) has been cutting prices in 2020. The first time it happened, Tesla bears wondered if it signaled weakening electric-vehicle demand. But EV deliveries are expected to grow 36% year over year in 2020—even amid global pandemic.
Ford Motor (F) sales, by comparison, are expected to drop more than 20% this year. Tesla bulls, for their part, saw it as a sign Tesla was making progress on manufacturing and battery costs, signaling a growing lead in EV technology compared with traditional auto manufacturers. The bulls won. Tesla stock is up 181% since the first price cut in May. The S&P 500 and Dow Jones Industrial Average are up 16% and 13%, respectively, over the same span. The same argument will likely play out Thursday when Wall Street digests the news. Gross profit margins at Tesla, for instance, have come in above 20% for the past two quarters. That's better than luxury peer BMW (BMW.Germany). Tesla might have some room to play with pricing to boost growth and market shares. Musk recently said growth was more important than profits, relatively speaking. He wants to produce and sell as many EVs as possible in coming years. Wall Street will also debate the appropriateness of the new base price. The last three digits, 420, are rich with meaning. April 20, or 4/20, is national weed day. Cannabis stakeholders likely selected the day because 420 is a "smoking in progress" call for police. What's more, Musk's infamous "funding secured" tweet referred to a deal to take Tesla private at $420—before a 5-for-1 stock split. That got him in hot water with the Securities and Exchange Commission. The number 42 is also the answer to the meaning life in Douglas Adams' book The Hitchhiker's Guide to the Galaxy. Musk, also the founder of SpaceX, is a science-fiction aficionado. "I think its just a very efficient way to get free marketing," New Street Research analyst Pierre Ferragu tells Barron's. Musk is good at generating buzz for Tesla products. That has tangible benefits for shareholders. Tesla doesn't advertise. General Motors (GM) and Ford spend about $4 billion a year each on ads. Ferragu, for his part, rates shares Buy and has a Street-high $578 price target for the stock. "On the broader price cut, Tesla simply needs to make S and X more attractive compared to 3 and Y, and more competitive with incumbents," adds the analyst. The S and X are the larger, more expensive models Tesla makes. The 3 and Y are smaller, lower-priced cars. Tesla shares closed up 3.3% on Wednesday, at $461.30, but were down 1.6% in recent trading. Write to Al Root at [email protected]