Car buyers are undoubtedly glad that electric vehicle (EV) manufacturer Tesla (NASDAQ:TSLA) implemented a series of price cuts. Investors didn’t seem to like this move at first. However, lately, TSLA stock traders seem to be warming up to Tesla’s savvy pricing strategy. Over the long haul, Tesla should prevail in the price war that it started. Therefore, the shareholders should hold on for a wild but potentially profitable ride.
Admittedly, Tesla has backtracked slightly on its EV price reductions. Specifically, the company increased its Model Y and Model 3 model prices in four countries by up to $290. Additionally, in China, Tesla hiked the price tags of its new Model S and Model X units by 19,000 yuan, which equates to $2,751.
At the end of the day, however, these are minor adjustments to a bigger-picture strategy. Remember, Tesla didn’t get to where it is today by being timid. Over the next five years, Tesla will have its ups and downs, but the company is sure to maintain its leadership position and continue delivering value to loyal shareholders.
Traders Punish TSLA Stock Over Profit Margin Concerns
As you may recall, TSLA stock tumbled 9.8% after Tesla released its first-quarter 2023 data. Tesla’s sales were robust, as the company reported an 18% year-over-year increase in total automotive revenue. On the other hand, Tesla’s total GAAP gross margin of 19.3% indicated a fall-off compared to 29.1% from the year-earlier quarter.
Tesla stock investors shouldn’t be too concerned, though. Tesla CEO Elon Musk knew full well that EV price cuts would hinder profit margins for a while. “It’s better to shift a large number of cars at lower margin and harvest that margin in the future as we perfect autonomy,” Musk assured.
In other words, this is all part of a bigger plan for Tesla to sell more EVs and invest the revenue into the company’s future growth. Meanwhile, automotive buyers should be glad to participate in Tesla’s deep discounts. Reportedly, it’s now possible to purchase a Tesla Model 3 for $47,240, which is 18.5% less than what it would have cost in August 2022.
Tesla’s EV Price Reductions Are Already Having an Impact
Some people might appreciate Tesla’s audacious strategy, while others won’t be on board with it. Still, there’s no denying that Tesla is a market mover. Already, there’s evidence that automotive giant Ford (NYSE:F) is reluctantly slashing some of its vehicles’ prices.
Piper Sandler analyst Alexander Potter predicted that Tesla “may cut prices further,” and I tend to agree with this. Musk and Tesla can continue to tighten the screws on the company’s competitors by lowering EV prices. This would be good for the consumers and the EV market generally, and bad for Tesla’s rivals.
In any event, it’s evident that Tesla is in the driver’s seat as the automaker has a sizable backlog of Model 3 orders. It actually got to the point where Tesla stopped accepting orders for Model 3 vehicles for a while. “Waitlist is too long. Will enable again as we ramp production,” Musk reported at the time.
So, Where Will Tesla Stock Be in 5 Years?
Musk is prepared to sacrifice Tesla’s profit margin in the short term to achieve high sales volume. This tactic should allow Tesla to invest in its future while keeping the automaker’s competitors at bay.
Additionally, Musk’s long-term plan will continue to put pressure on rivals like Ford. Not only that, but Tesla’s price discounts could convince more automotive buyers to give EVs a try.
It’s a win-win scenario, and the big picture is bullish for Tesla. Therefore, it’s not unreasonable to expect Tesla stock to double in five years. $350 is a realistic price target as Tesla pursues a smart long-term strategy and offers excellent value to its customers and investors.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.