Why Tesla Stock Dropped Again

What happened

The week is ending on a down note for Tesla (TSLA 0.40%) investors Friday, as shares of the electric car superstar slumped for a second straight day — down 3.5% as of 10:30 a.m. EST. Recent declines in the stock price have owed mainly to problems with the supply chain in China, and weakening demand among car buyers, but today’s stock price tumble seems to be on Tesla because it’s cutting prices in China. Again.

So what

Citing a “plunge” in deliveries of its EVs in China in December, The Wall Street Journal reported today that Tesla is cutting prices on its Model 3 electric sedans and Model Y electric crossovers by 6% and 13%, respectively. And these price cuts are on top of price cuts announced late in 2022.  

At $32,700 for a Model 3, the Journal points out, Tesla is now selling its Model 3 in China for 30% less than Americans pay for the car. And at $37,000, a Chinese Model Y now costs 36.5% less.    

Tesla explained the cheaper prices by saying it as introduced “engineering innovations” and “cost controls.” On the one hand, though, that raises the question of why these benefits wouldn’t make Tesla’s cars cheaper in the U.S. as well as China (implying there may actually be a different reason Tesla is cutting prices in China).

At the same time, in offering up any explanation at all, Tesla … effectively confirmed the news that it is selling its cars at cut-rate discounts in China.

Now what

So what’s up with Tesla right now? The Journal‘s theory is that competition from rival domestic electric car brands in China is eating into demand for Tesla’s EVs. At the same time, the paper points out that when Tesla announces one price cut in China, it may encourage local car buyers to hold off on making a purchase, in anticipation the price will be cut even further.

If this is what’s happening in China today — if simple bargain hunting is what’s driving the drop in demand — this could turn into a self-fulfilling prophecy for Tesla as it cuts prices to spur demand.

On a brighter note, though, here in the U.S., Tesla’s slumping sales have been most often explained by the fact that the U.S. government was holding up tax incentives on Tesla sales until the new tax year began (i.e., Jan. 1, 2023). Now that the calendar has flipped, though, and those tax incentives can go into effect, we could see a burst of new sales of Teslas here — reducing the pressure on Tesla to keep cutting prices over there.

Long story short, yes, Tesla stock is falling today. Don’t be shocked if we see a bounce, though, once Tesla’s Q1 sales numbers come out in April.  

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.