Tesla’s price cuts may be paying off | the motley fool

After it announced major price cuts for its vehicles earlier this year, some investors may have worried about whether tesla‘s (TSLA) -2.06%) orders were suffering during a tough economy. Regardless of what happened to Tesla’s EV order volume before the company cut prices, there’s good news this week about how these price cuts are affecting the company’s order volume now. Tesla is reportedly seeing “unprecedented demand” for its vehicles in the US, according to the anonymous source at electric vehicle news website Electrek, who is “familiar with the matter.”

With the apparent recovery in demand for Tesla vehicles, the company is well positioned for another year of strong growth. But can the automaker grow as fast as it did in 2022?

demand trends

Last week, Tesla implemented massive price cuts across its entire lineup of vehicles in North America and Europe. This was on top of price cuts in China earlier in the year. One Tesla model saw price cuts of up to 20%.

The price cuts, of course, may have led some investors to conclude that demand for the company’s vehicles has been weak. While this is possible, the most likely scenario is that orders for the company’s vehicles did not grow as fast as production. Tesla came out of its third quarter building vehicles at record rates. In addition, the continued increase in production at Tesla’s new factories in Texas and Germany is positioning the company well to continue ramping up production rapidly through 2023. But what good would high production levels be without a sharp increase in production? sales this year? ? Lower prices could help stimulate enough demand to meet rising production rates.

Fortunately for Tesla shareholders, according to the Electrek source, the lower prices are, in fact, driving a substantial increase in orders for their vehicles. The source says orders for its vehicles have risen to record levels at many of Tesla’s US stores.

Of course, the lower prices mean revenue will likely grow more slowly than unit sales in 2023. But this doesn’t necessarily mean profit can’t grow faster than revenue. A Tesla spokesperson in Europe recently told the media that the price cuts reflected “a partial normalization of cost inflation.”

Expect strong growth from Tesla in 2023

If there’s anything to take away from Tesla’s recent price cuts, it’s that the company seems willing to do whatever it takes to keep growing sales rapidly. This is not too surprising considering that the company has been building significant production capacity in recent years. Additionally, Tesla’s new factories in Texas and Germany have a long way to go before they are producing the company’s target levels for the new factories. Additionally, Tesla has an incentive to increase delivery volumes at its factories because that means fixed costs will be spread over more deliveries. In the company’s third-quarter update, Tesla said its factories had the equipment installed to support annualized production capacity of up to 1.9 million vehicles. This means there is plenty of room for growth in production from the approximately 1.37 million vehicles the company built in 2022.

Given Tesla’s aggressive price cuts, reports of increased demand following these price cuts, and the company’s installed production capacity, it would not be surprising to see Tesla deliveries grow as fast as they did last year. past. With deliveries increasing 40% in 2022, maintaining this growth rate in 2023 would be an incredible achievement.