Despite a sharp drop in Tesla's (NASDAQ:TSLA) stock price yesterday, there has been no immediate reaction before the market opened. The company's shares remain at a two-and-a-half-month low with no signs of recovery.
While the year saw an increase of 32%, to maintain solid growth, Tesla has decided to lower prices on its electric vehicles worldwide, including in the US where it faces increasingly fierce competition. This led Q1 gross margins to decline by 19.3% from last year’s figure of 29.1%, falling short of the average forecast of 21%. Since Tesla began cutting prices, its stock has lost a quarter of its value.
The company stated that despite price reductions in some areas during Q1, it was able to maintain controllable operating margins reduction and would further cut costs through more efficient production methods at modernized facilities. It stood by its production forecast for this year but is expected to face challenges due to economic growth declining towards the end of this year as per Fed estimates.
As we are dealing with an automotive sector facing typical ups and downs, management made a wrong choice by sacrificing margins to follow sales strategy; therefore, we must be prepared for consequences when recession hits later this year.
Savers are struggling due to high-interest rates making loans expensive while purchasing cars; thus negatively impacting not only Tesla but also other automakers.
Tesla was forced into lowering prices following huge and rapid inventory growth within just one year highlighting overproduction concerns leading potential buyers delaying purchases until selling prices fall further causing difficulty getting out of such situations.
Lowering prices could have adverse effects on brand reputation resulting in loss exclusivity; hence confirming that currently overvalued my valuation is $85 which will stay unchanged for coming quarters.
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Author's note: The information and content provided on this site should not be considered as an invitation to invest in the financial markets. The Content is a personal opinion of Mr. Antonio Ferlito.