Tesla‘s shares dropped more than 6.8% on Thursday as CEO Elon Musk indicated that the electric vehicle manufacturer would continue to cut prices to encourage demand, even though this would have a significant impact on the company’s margins. The announcement caused a sell-off of automakers worldwide as analysts predicted Tesla would sacrifice margins in order to maintain its market share in a sector that is slowing due to economic uncertainty.
In the first quarter of 2022, Tesla’s gross margins fell to their lowest level in over two years, missing market expectations. In response, the company started a price war in January to protect its market dominance in the US and expand its presence in China, its second-largest market. While Musk suggested that more such moves were planned, the announcement spooked investors who were concerned that margins would be compromised in the pursuit of growth.
The price cuts also prompted at least 15 analysts to lower their price targets for Tesla, with some predicting a $50 billion market value loss if the losses continue. Canaccord Genuity analysts noted that the company’s priority is to prioritize units over short-term profits in a volatile macroeconomic environment with weakening demand.
Although some analysts believe that Tesla’s cost leadership position means that the price cuts are the right strategy for the long-term, others predict that the situation may get worse before it improves. For instance, RBC analyst Tom Narayan believes that while the price cuts leverage Tesla’s cost leadership position, they will likely cause margins to worsen before they get better.
The market response was widespread, with American carmakers such as Ford and startups like Lucid Group declining between 3.3% and 4.4%. Meanwhile, French automaker Renault SA, which has decided not to drastically reduce prices for its EVs despite Tesla’s downward trend, dropped 7.6%, and Germany’s Volkswagen fell 3.5%.