Tesla will lower prices of its cars - if the inflation slows down

Elon Musk replied to a Twitter question about Tesla lowering the prices of its vehicles. When asked if the company had any plans to lower prices after supply chain constraints were no longer an issue, the CEO quipped that if the inflation eventually calms down the company will lower the prices.

If you can remember the first electric cars were quite expensive but we were promised that once the production scales up, the costs of manufacturing will go down and as a result the prices will be much lower. Then the pandemic came. And then the invasion in Ukraine followed.

All global manufacturers are suffering from supply chain bottlenecks, Tesla initially appeared to be riding out the storm but eventually it took its share of the pain. Costs of raw materials have gone through the roof and rampaging global inflation only added fuel to the fire. Tesla Model 3 used to start at $35,000 and now it is $44,900 with some customers in Europe paying an extortionate €52,970.

Inflation and increased costs are only part of the story though. Those two are a great excuse to lift the prices but a closer look at Tesla’s revenue and profit margins tells the true story. The revenues have been growing year on year with 2021 closing 70.67% higher than 2020 and 2022 closing 73.04% higher than 2021. Yes - the company is ramping up the production and the sales are growing but the margins have been growing as well.

If the story of increasing costs was to hold any water, the margins should have stayed level but they just kept going up. In the last 4 years Tesla’s gross margin went from 14.35% to a whopping 27.1% - the last 4 years have seen the biggest number of price increases. The company’s net margin in the same time went from negative 19.89% to positive 13.51%.

Tesla is arguing that due to the production delays the prices quoted now are for cars that will be manufactured in the next 6 to 9 months in some cases and it is difficult to predict further cost increases. Customers seemingly are not being put off by the price hikes and the company has a healthy order book. Shareholders can sleep comfortably despite market turmoil because whatever future brings, Tesla will only increase its cash reserves that will enable it to ride out any storms ahead.

Can we realistically expect Tesla prices to go down if the inflation goes down? Not really. It will take a while for the inflation to reach last year’s levels and by then Tesla will have a smaller model ready for the market. With the Model 3 now sitting comfortably at the $50,000 mark, the new Tesla will take the $35,000 spot and we’ll have the promised cheap Tesla once again. And then this game will be repeated all over again.

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