Tesla Model 3 are located in a Tesla Service Center.
Silas Stein | picture alliance | Getty Images
Tesla shares dipped as much as 4% early on Wednesday but recovered by market close, after the company said it would cut the price of its cars for customers in two major markets — North America and China.
Overnight on Tuesday, Tesla said it was cutting prices for its Model 3, S and X in North America by as much as 6%, and Model S and X vehicles in China by 4%. The company’s Model S sedans and Model X sport utility vehicles (SUVs) are its older and higher-priced vehicles, relative to its Model 3 sedan and Model Y crossover SUV.
The move shows some realism in the face of the coronavirus pandemic and subsequent spike in unemployment, which could hurt demand for vehicles. Researchers IHS Markit recently projected that global vehicle sales would drop by 22% this year. Tesla has not disclosed its order book numbers recently, and during its first-quarter earnings call, the company stopped promising shareholders it “should comfortably exceed” deliveries of 500,000 cars to customers in 2020, instead saying it had “capacity installed to exceed 500,000” deliveries.
Wedbush Securities analyst Dan Ives saw the price cuts as a necessity, writing in an e-mail to CNBC, “This is a smart strategic move in our opinion given the current macro and COVID environment consumers are facing.” He added, “Cutting prices to further stimulate demand in the US is feasible in the near term, as the current cost structure and higher FSD pricing gives Tesla more flexibility to make these price cuts.”
Tesla CEO Elon Musk announced earlier this month that the price of the company’s advanced driver assistance system, which Tesla markets as “FSD” or “full self-driving,” would increase this July by $1,000, with more increases in the future. During Tesla’s Q1 earnings call, executives also said Tesla would offer FSD as a subscription service. Musk said at that time, of the subscription option, “It will be probably toward the end of this year.”
Wedbush has a neutral rating on shares of Tesla, and Ives revised his price target higher from $600 to $800.
Roth Capital Partners’ Managing Director and Senior Research Analyst Craig Irwin saw Tesla’s electric vehicle price cuts as a cause for greater concern. Roth Capital has a sell rating on shares of Tesla, and a $350 price target according to a note it sent investors following the vehicle price cuts.
“Reading the tea leaves, it seems like Tesla is seeing flagging demand in its core North American market,” Irwin wrote in an e-mail to CNBC. “The most important question is can Tesla continue to deliver growth in North America? Is this all COVID, or does market saturation play a role? We think market saturation is starting to play in Tesla’s North American demand.”
In Roth’s note on Wednesday, Irwin cited IHS forecasts for a 22% drop in North American automotive sales this year, a trend driven by the Covid-19 pandemic.
The Tesla Model X that will carry astronauts to the launchpad for SpaceX is parked in front of the Vehicle Assembly Building at NASA’s Kennedy Space Center in Florida.
Musk was focused Wednesday on his aerospace venture SpaceX, which was set to launch NASA astronauts Douglas Hurley and Robert Behnken on a mission to the International Space Station today, marking the company’s first crewed flight, and a historic public-private partnership for NASA.
Behnken and Hurley even rode to their launchpad in a Tesla Model X.
WATCH: Elon Musk and Jay Leno take a spin in the Cybertruck