Tesla’s (TSLA 0.49%) pricing power may be a thing of the past.
The electric vehicle (EV) leader has slashed the prices of its vehicles several times this year in a bid to remain the top dog in the space and boost sales. In the third quarter, Tesla’s average selling price for all its vehicles fell by around $9,000 to just over $45,000.
CEO Elon Musk spent much of the Q3 earnings call talking about how important it is for Tesla to be competitive on price. Musk explained that most car buyers use some form of financing, so the company has lowered the price of its vehicles to counter higher interest rates and keep monthly payments from rising.
Musk also said that there is “very significant price elasticity” in the auto sector and at Tesla, which may surprise some investors who assume that Tesla is able to charge higher prices because it’s perceived to have better technology or a better brand.
However, in its struggle to achieve price parity with mainstream vehicles, Tesla could face another obstacle in 2024.
Tesla’s tax credit incentives are shrinking
Musk also acknowledged the $7,500 EV tax credit on the call, but said it wasn’t as much of an incentive as it might seem because it’s a burden for some Tesla buyers to wait until tax season to claim the credit.
However, Tesla is now warning customers on its website that some of its vehicles will no longer qualify for the full $7,500 credit. According to Tesla, the Model 3 Rear Wheel Drive (RWD) and Model 3 Long Range options will only qualify for a $3,750 tax credit, rather than the full $7,500 credit, because some of their components come from China.
The Department of Energy changed the tax credit at the beginning of December, and the two Tesla Model 3 trim levels affected by the move are Tesla’s cheapest, meaning they could put off some of Tesla’s most price-sensitive customers.
Tesla is using the rule change to try and incentivise the purchase of these vehicles before the end of 2023, but this announcement also seems like an acknowledgement that the lower incentive could be a challenge to selling these cars.
Will the change hurt Tesla?
The tax incentive change will only affect a minority of Tesla buyers, as most of its car sales come from outside the U.S. In addition, the Model Y outsells the Model 3, although the Model 3 is its second best-selling vehicle.
The change in tax incentives also only applies to two of the three trim levels offered on the Model 3. The Model 3’s most expensive trim, Performance, is not affected. It’s unclear what percentage of Model 3 sales come from the affected trim levels, but it’s safe to assume that around 10% of Tesla’s sales come from the Model 3 RWD and long-range trims sold in the US, as around 40% of Tesla’s sales come from the US and the Model 3 is its second-most popular model in the US.
Taking Musk’s comments at face value, it seems that a significant percentage of the affected Model 3s could become too expensive for Tesla’s customers. Before the credit, the Model 3 RWD starts at $38,990 and the long-range version starts at $45,990. Adding almost $4,000 to the cost of the vehicle is likely to put some customers off.
While losing a few percentage points of revenue may not seem like a big deal, Tesla stock is priced for perfection and the company is currently struggling with slowing revenue growth and falling profits, as well as signs that the broader EV market is weakening.
In other words, the tax credit change comes at a bad time for Tesla, and it’s likely to add to its challenges. Given its expensive valuation and broader macro pressures, this could lead to a sharp sell-off in Tesla shares next year.
