Here's What the Market Doesn't Get About Tesla's Price Cuts
On the surface, the move seems to hint at weakness. Electric vehicle maker Tesla (NASDAQ: TSLA) has been able to charge premium prices for its cars since the company's inception. But the price cuts of between 6% and 20% -- depending on the model -- the company introduced in mid-January suggest this pricing power is finally fading. Blame the tepid economy, competition, or a combination of both.
Largely being overlooked by critics of the move, however, is that Tesla can afford these discounts. In fact, it can really, really afford them.
Investors keeping close tabs on Tesla may be familiar with the chart below, which comes from its fourth-quarter earnings presentation. Simply put, even though the average selling price of Tesla's cars has fallen from more than $100,000 back in 2017 to a little over $50,000 now (reflecting the debut of the lower-cost Model 3 and then the even-cheaper Model Y), the profit margins on its operation have improved over time. This is how it should be. Greater scale should improve operating efficiency on a per-unit basis.
Source Fool.com
