Tesla led the plunge in electric car stocks, what happened?

On Monday, April 3, Tesla's share price fell sharply, falling more than 7% during the session and closing down 6.12% at $194.77. Not only Tesla, but also fell on Monday, dragged down by lower-than-expected first-quarter deliveries.

The market is worried that although Tesla's production and sales in the first quarter both hit records, igniting the price war will eventually erode Tesla's profit margin; In addition, the electric vehicle tax rebate policy in the United States will change again, and the market is worried that this policy will have an adverse impact on Tesla.

After the price war began, the market was worried about Tesla's profit margin

First of all, this is related to Tesla's first-quarter deliveries announced over the weekend. At the end of last week, Tesla announced that the first quarter of electric vehicle deliveries was 422875, slightly higher than market expectations, an increase of 36% year-on-year, less than the 50% target set by Tesla management itself, and the month-on-month growth rate was 4%; Production was 440808 units. But the record production and sales have come at the cost of Tesla's multiple price cuts in the United States, China and Europe.

Bernstein analyst Toni Sacconaghi believes that Tesla's price cuts have and will weaken industry profitability (including Tesla).

Sacconaghi isn't the only one concerned. Many investors are worried that Tesla will need more price cuts in the future to drive sales, and as a result, the company's profit margins will be eroded.

"Many investors believe Tesla's recent price cuts reflect its structural cost advantages, which will help Tesla pressure competitors and gain greater market share and dominate the electric vehicle market," Sacconaghi said. However, we still believe that price cuts have and will weaken industry profitability (including Tesla's), but given Tesla's deep pockets, it is unlikely to back down from the price war now. ”

Sacconaghi's initial price target for Tesla is $150, well below its current share price of nearly $195. "The key question investors have to ponder is, what could be Tesla's profit margin in the event of a significant price cut but higher costs," Sacconaghi said. ”

For all of 2023, Tesla previously said it expects to produce 1.8 million vehicles, and hinted that deliveries will also be close to that figure. Tesla executives say they aim to keep production and deliveries growing at an average annual rate of 50 percent for years to come.

Some analysts say further price cuts may be needed to achieve this level of growth.

Barclays' Dan Levy, who has a neutral rating on the stock and a $275 price target, said the increase in auto inventories has been on a consistent trend over the past three quarters. He wrote that "price reductions may need to be phased out," especially as the company ramps up production at new plants outside of Texas and Berlin.

The US electric vehicle tax rebate policy has regenerated, can Tesla still enjoy discounts?

In addition, some of the tax cuts for electric vehicles in the U.S. are partly to allow Tesla and its customers to take advantage of the tax credits provided by the Inflation Reduction Act. But an ongoing concern is that increased competition will force automakers to keep lowering prices as new electric vehicles continue to hit the market, potentially leaving companies unable to meet the threshold for using tax credit incentives.

What worries the market more is that the US tax refund policy will change again.

On Friday, the U.S. Treasury Department and the Internal Revenue Service unveiled new EV tax credit rules. Automakers have been waiting for the rules to determine whether their models are eligible. Unless automakers can find workarounds to take advantage of the rules, the result is likely to be a significant reduction in tax credits for electric vehicles from April 18, when the new regime takes effect.

A year ago, consumers could receive a $7,500 tax credit for a new electric car from a manufacturer as long as the cumulative sales of an automaker did not exceed 200,000 electric vehicles. Tesla and General Motors no longer meet that condition, and Toyota Motor Corp. is about to reach that cap on electric vehicle sales. Ford Motor Company is now dominating with the new Ford Electric Horse and F-150 Lightning, while South Korean manufacturers Hyundai Motor and Kia Motors also have the upper hand.

Then there's the Inflation Reduction Act. From the day the bill was signed on Aug. 16 last year, cars must be made in North America to qualify for the reformed tax credit. Thanks to this regulation, Hyundai, Kia and most German luxury cars are directly out.

The rule changed again on Jan. 1, lifting the sales cap of 200,000 vehicles while imposing new limits on prices and buyers' income for eligible models, allowing Tesla and General Motors to be shortlisted again. Manufacturers have gone to great lengths to qualify, Tesla has cut prices for promotions, and GM lobbied to reclassify the Cadillac electric car as an SUV — a category with a higher price threshold for tax credits. In theory, the amount of the tax credit also depends on the battery capacity, but in practice, almost all North American electric vehicles that have not exceeded the price cap can enjoy the full $7500 credit.

However, by April 18, everything will change again as more strings are introduced.

From that day forward, half of the $7,500 tax credit will depend on whether battery modules are primarily made in North America, and the other half on whether the cell minerals are primarily sourced from U.S. free trading partners. In the next five years, to qualify for the tax credit, the proportion of these components and minerals in automotive batteries will be further increased from 50% and 40%, respectively.

Manish Dua, a consultant at Benchmark Minerals in New Delhi, who has been studying tax credit rules, said it could prompt automakers to cut prices or pay out of pocket to fund incentives to boost sales. Model 3 credits for less than $50,000.

Ben Kallo, an analyst at Baird Equity Research, believes that Tesla "is currently building its domestic battery manufacturing capacity and is looking for another partner for local production of batteries in the United States."