Tesla Falls As Latest Price Cuts Put Focus On Margins; EV Giant Announces China Megafactory

Tesla (TSLA) announced Sunday it will build a new Shanghai facility to make its large energy storage units. TSLA shares fell early Monday after the EV giant made further U.S. price cuts Thursday night.

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Tesla unveiled plans Sunday to construct a new Megapack factory in Shanghai, adding to its foothold in the world’s largest EV market. The company announced its Shanghai megafactory will be capable of producing 10,000 Megapacks per year. Tesla already has a Megapack factory in Lathrop, California, ramping up production of its energy storage systems.

The global EV’s energy storage business uses batteries from China’s CATL

A Shanghai Tesla megafactory would join Tesla’s current Shanghai factory producing its Model 3 and Model Y vehicles.

Tesla is expected to break ground on the plant in the third quarter and start production in the Q2 2024, Chinese state media outlet Xinhua reported.

CEO Elon Musk tweeted Sunday the Shanghai Megapack factory will “supplement output of Megapack factory in California.”

Tesla stock fell nearly 3% Monday during premarket trade. Investors are reacting to last week’s Tesla price cuts after U.S. markets were closed Friday.

Tesla Cuts Prices

The global electric-vehicle maker reduced Model S and X prices by $5,000 in U.S., the third price reduction this year. The Model S starts at $84,990 while the Model X now begins at $94,990. Meanwhile, Tesla cut U.S. Model 3 prices by $1,000 to an entry price of $41,990. The Model Y was cut $2,000 to $49,990.

Earlier in the week, Tesla also cut Model 3 and Y prices in Australia once more. Tesla trimmed prices in China on Jan. 6, following big cuts in late October. The global EV maker also significantly reduced prices in the U.S. and Europe on Jan. 13. The company reduced European prices again in early March.

Those price cuts and new U.S. EV credits lifted first-quarter deliveries to a record, but fell short of FactSet views. Production outpaced deliveries once again, with Model S and X output nearly twice as high as sales.

TSLA’s most recent U.S. vehicle price cut is ahead of the implementation of new battery and mineral component requirements to qualify for the full Inflation Reduction Act $7,500 tax credit for EVs.

The Biden administration announced on March 31 that vehicles eligible for the full $7,500 tax credit must have batteries with specific amounts of components from North America and critical minerals sourced in the U.S. or from certain countries.

Vehicles that meet one of the critical minerals or battery components requirements will be eligible for a $3,750 tax credit.

The battery criteria goes into effect April 18, when a list of models that qualify for the full $7,500 tax credit will be issued.

The Model 3 contains a battery from China. Tesla’s Model 3 page on its website has a banner informing EV shoppers the “$7,500 tax credit will be reduced to $3,750 for Model 3 Rear-Wheel Drive on April 18.”

Tesla Stock

TSLA shed nearly 11% to 185.06 last week following its Q1 delivery report. Tesla stock plunged below a 200.76 cup-with-handle buy point and its 50-day moving average this week.

Tesla stock forged its base below the 200-day line, which tends to be a warning sign. TSLA appears to be working on a new handle, already present on a weekly chart, with a 207.89 buy point, according to MarketSmith analysis.

Tesla earnings for the first quarter are due April 19, when investors will see how price cuts have hit profit margins so far.

Citigroup (C) analyst Itay Michaeli wrote Monday that Tesla’s price cuts were not a surprise but will place an even greater emphasis on Q1 gross margins. Stronger than expected gross margins would support the idea Tesla’s price trimming actions come from a position of cost strength while also reflecting lower input costs, according to Michaeli.

Meanwhile, Wolfe Research analyst Rod Lache wrote Monday that while U.S. price cuts may raise questions about vehicle demand, there is “significant cost reduction ahead” for Tesla.

Lache added new investments in Tesla Energy are likely underappreciated by investors. Wolfe Research maintains a “Peer Perform” rating on Tesla stock with Lache adding he wouldn’t be surprised to see a negative short-term reaction in TSLA share price on the news of the price cuts.

Please follow Kit Norton on Twitter @KitNorton for more coverage.

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