Why Tesla Stock Just Hit a 1-Week Low

What happened

Tesla (TSLA -3.82%) stock fell to its lowest price in a week on Friday morning, down 5.9% as of 9:45 a.m. ET, after cutting prices steeply on both Model 3 electric sedans and Model Y crossovers in both the U.S. and Europe.

Across a range of configurations, Tesla shoppers in the U.S. now have the opportunity to pay anywhere from 6% to 20% less today than these electric cars cost yesterday. And factoring in federal tax credits, which are more generous for lower-priced electric vehicles (EVs) than for more expensive ones, the discounts go as high as 31%, reports CNBC.  

So what

In Germany, Reuters says, similar but smaller cuts lower the cost of buying a new Tesla Model 3 or Model Y by anywhere from 1% to 17%. Commenting on the cuts, Tesla Germany explained in a statement that “partial normalization of cost inflation” lay behind the cuts, and Tesla is simply trying to “pass this relief onto our customers.”    

That may be so. But at the same time, Tesla is certainly sticking it to its competitors. By cutting costs, Tesla not only works to undercut its rivals on price, but simultaneously slips more Tesla models under U.S. IRS thresholds that qualify for tax rebates.

Under current U.S. law, only electric cars costing under $55,000 new — or electric trucks and SUVs selling for less than $80,000 — can qualify for the government’s $7,500 income tax credit. Tesla’s well-timed price cut adds at least one more Model 3 configuration (the Model 3 Performance) and one Model Y configuration (the Model Y Long Range AWD) to the list of its EVs qualifying for the credit.  

Now what

Long story short, this looks like a coup for Tesla, and potentially the start of a price war with its competitors. So why are investors selling Tesla stock on today’s news?

Well, there’s the obvious reason: There’s fear afoot that Tesla is lowering prices because that’s the only way it can sell cars in the face of weak demand. In this case, lower prices on Tesla cars would mean less profit for Tesla — unless, that is to say, Tesla’s input costs really have dropped so much that all the company is really doing here is “passing this relief onto its customers,” as it says.

In that case, the gross profit margin could remain intact, and operating and net profit margin as well — even as overall profits surge due to more sales, and more revenue coming in.

Whether or not you’re in the market for a new Tesla EV today, if you’re weighing whether or not to buy Tesla stock, this is how you should hope things play out.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.