Tesla Shares Drop on Price Cut, Disappointing Model 3 Deliveries

Shares in Tesla dropped as much as 9 percent on Wednesday on worries of future profitability, after the electric car maker cut U.S. prices for all its vehicles to offset lower green tax credits, while falling short on quarterly deliveries of its mass-market Model 3 sedan.

Analysts questioned whether the US$2,000 price cut on all models signaled lowered demand in the U.S., and ultimately whether the move would undermine nascent profitability at the Silicon Valley automaker, which has never posted an annual profit (US$1=W1,127).

"In our view, this move could suggest that what many bulls assume to be a substantial backlog for Tesla may be less robust," wrote Bank of America analyst John Murphy in a client note.

Chief Executive Elon Musk, who has often set goals and deadlines that Tesla has failed to meet, surprised investors by delivering on his pledge to make Tesla profitable in the third quarter, for only the third time in its 15-year existence. But the company is unprofitable for the first nine months of 2018, and cash flow remains a concern for investors.

Musk has been under intense pressure to deliver on his promise of stabilizing production for the Model 3, which is seen crucial for easing a cash crunch and achieving long-term profitability. It said it was churning out almost 1,000 Model 3s daily, broadly in line with Musk's promises but slightly short of Wall Street expectations. The company said it would begin delivering Model 3s to Europe and China in February.

The price cut of US$2,000 beginning on Wednesday on the Model 3 -- as well as on its higher-priced Model S and Model X -- took the market by surprise and weighed on the stock, pushing it down 9.4 percent in morning trade. Shares were last down 6.7 percent at US$310.48.

The price cut comes as automakers expect U.S. new vehicle sales to weaken in 2019, and increased competition from new electric vehicle entrants. Tesla sales benefited from a US$7,500 federal tax credit on electric vehicles throughout 2018, but that full credit expired at the end of 2018, and new buyers will now receive only half that amount.

Under a major tax overhaul passed by the Republican-controlled U.S. Congress in 2017, tax credits that lower the cost of electric vehicles are available for the first 200,000 such vehicles sold by an automaker. The tax credit is then reduced by 50 percent every six months until it phases out.

"The price cut is what's driving the stock lower, as it openly acknowledges the sunset of subsidy dollars is a material headwind," said Craig Irwin, an analyst with Roth Capital Partners.

But some said fears of eroded demand were overblown. Gene Munster of Loup Ventures calculated that the lowered tax credit equaled, on average, to a 3-percent discount on a Tesla. If Tesla had a demand issue, therefore, the company would have cut its prices by more than 3 percent, he wrote in a note.

Also on Wednesday, General Motors said it had sold its 200,000th electric vehicle in 2018, similarly triggering a phase-out of the federal tax credit, according to a source.