Tesla has been slashing the price of its vehicles pretty relentlessly by automotive standards. This is not the usual price cut you see offered by street vendors who are just interested in getting rid of their wares.
Cutting prices in an industry that segments customers from mass market to ultra-luxury has several implications. First and foremost, it is your brand equity that would be affected. The power of a brand needs no further explanation. As brand perception and equity increase, price sensitivity decreases, which translates to greater profits.
In the automotive sector, the quality of the cars, such as their build and interior, often correlates with their price tags. In the lower price range, consumers are willing to forsake expensive leathers and materials for plasticky consoles or knobs.
However, Tesla cars are not badly built. Its interior is minimalist yet refined. Luxurious and yet not over the top. By aggressively slashing its cars’ prices, Tesla has essentially started a price war in the automotive industry.
So is there a master plan for this price war? Why start a price war if you are not confident of winning it in the first place?
We believe Tesla’s current price cuts lend themselves to a master stroke of a strategy that is to acquire, retain, and monetize.
Obviously, by slashing the price of its most popular models, Tesla aims to dramatically increase market share. We believe Tesla aims to get a share of at least 70% of the American EV market. This would give it a formidable market share.
We believe Tesla will use its cars as a platform to serve its complementary suite of software and services. Think of it like how Apple’s app ecosystem has managed to entrench its users and create a huge moat to cross over to Android, just on bigger hardware. In addition, TSLA is part of Elon Musk’s empire and is able to leverage each other’s capital. Look at how Musk sold TSLA shares to fund his Twitter purchase. With the further unlocking of value in SpaceX, we believe TSLA has a strong founder with a vision that is beyond ordinary.
With all this said and done, how should a trader consider trading TSLA? In our humble, non-professional opinion, we believe the outlook for TSLA remains neutral. Yes, there are more EV competitors. But TSLA’s current aggressive pricing policy looks set to cement its lead in the EV market. However, this would undermine its profit margins as well. One should have greater clarity in the next few quarters to see if TSLA’s pricing strategy works out according to plan and gains even greater EV market share. Perhaps a trader can consider a scalping strategy if he or she prefers to trade on technicals. For long-term investors who believe that TSLA can emerge as the eventual EV winner, a DCA (Dollar Cost Averaging) bot would do well.
Disclaimer:
Any information provided in this article is not intended to be a substitute for professional advice from a financial advisor, accountant, or attorney. You should always seek the advice of a professional before making any financial decisions. You should evaluate your investment objectives, risk tolerance, and financial situation before making any investment decisions. Please be aware that investing involves risk, and you should always do your own research before making any investment decisions.