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Tesla higher as Goldman weighs ‘strategic implications’ of price cuts

You’re here (TSLA) dropped the bomb on the auto market with huge price drops last week, and now Wall Street is catching up with post-game analysis, if you will.

In a note titled “Analysis of the Impact of Tesla Vehicle Price Cuts,” Goldman Sachs analyst Mark Delaney takes a glass half-empty, half-full approach.

Delaney says price cuts imply concerns about falling demand in the United States

“While the reduced prices for the Model 3 and Y help the company better manage the roughly 20% to 30% of vehicles sold in the US market in the $40,000 to $55,000 price range, the price cuts also imply that recent orders were tracking weak,” Delaney wrote in a note to clients. “We are therefore lowering our EPS estimates on the discounted ASP (average selling price).

On the other hand, the price reduction will increase the volume of vehicles sold, and taking into account Tesla’s Giga plant expansions (Shanghai and allegedly Austin) and ramp-ups, the automaker might actually be in able to withstand any drop in retail prices, with improved efficiency.

“We see [stronger volumes] important to Tesla’s vertically integrated model, especially since its new plants likely offer attractive unit economics at scale (we believe COGS per vehicle at the new Austin and Berlin plants over time will be closer to Shanghai than Fremont, and in the low to mid $30,000 per vehicle line),” Delaney said.

Additionally, Delaney thinks higher volumes can act as leverage to increase “monetization opportunities” because Tesla can market high-margin software and services offerings to new customers.

Finally, Tesla’s scale and unit economics are a big competitive advantage over traditional automakers, Delaney says, and any increase in volumes is a net negative for competitors. “The strategic implications of the price cuts (and the fact that investors were already anticipating at least some price cuts in our view) likely explains the stock reactions on 1/13 with Tesla shares down 1% (vs. S&P 500 flat) and ahead of competitors such as Ford (-5%), GM (-5%) and RIVN (-6%),” Delaney noted.

The added pressure on Tesla’s competitors from reduced prices for the Model 3 and Model Y, combined with the IRA tax credits now available for most of these vehicle versions, means competitors will be squeezed even harder. With the new pricing in place, Tesla’s Model 3 and Model Y compare very well against the competition, Delaney said.

Goldman on the Tesla Model Y against the competition

Goldman on the Tesla Model Y against the competition

Delaney notes that negative margins for Tesla’s competitors, along with the limited availability of competing electric vehicle offerings, is another factor in Tesla’s favor.

That being the case, ) dropped a bombshell on the auto market with huge price drops last week, and now Wall Street is catching up with post-game analysis, if you will. Ps from price cuts.

Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on instagram.

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