Tesla (TSLA) could dominate the auto business with an old-fashioned business strategy: discounting.
To explain, Tesla Motors’ (TSLA) production costs could fall so low. Competitors cannot match them. Hence, Tesla could dominate the market with cheap electric vehicles.
Tesla has cut the cost of its vehicles in half in the last five years, Eletrek claims. Elektrek provides no numbers but a new Model 3 cost $43,490 on 7 February 2023. Hence, the cost of a Tesla fell from $86,980 to $43,490 in five years.
The price of Tesla’s popular Model Y SUV fell to $55,000 in February 2023, The New York Times reports. Times writer Jack Ewing speculates electric vehicle prices will soon match those of fuel burning autos.
A $7,500 federal tax credit can cut the cost of a Model Y to $47,500 and a Model 3 to $36,000. Hence, electric car prices are similar to gas burners when you figure in the tax credit.
Tesla can Undercut Other Automakers
Thus, Tesla’s price for a basic electric vehicle is below the average price paid for a new car in the United States. The average new vehicle price was $48,301 across the US in August 2022, The Kelley Blue Book estimates.
Importantly, Tesla (NASDAQ: TSLA) is dramatically undercutting most electric car manufactures. Kelly estimates the average US electric vehicle cost was $66,524 in August 2022.
Hence, Tesla can undercut automakers. It can sell an electric vehicle that is cheaper than most gasoline and diesel vehicles and undercut direct competitors.
However, Tesla’s market share has serious limits. Notably, Tesla is not manufacturing the vehicles Americans want to drive. Such as pickup trucks, large SUVs, and vans.
Notably, America’s best-selling vehicle is the Ford F-Series pickup. Ford (F) sold 653,957 F-series trucks in 2022. There is a Ford F-150 Lightning pickup. The F-150 Lightning is so popular, Ford has a waiting list for it.
How Tesla Threatens all Automakers
Yet I think Tesla (TSLA) could become a serious threat to traditional makers if it diversifies its line up.
I consider Tesla a threat to other automakers because of its falling production costs. Insideevs claims Tesla’s vehicle production cost fell from $84,000 in 2017 to $36,000 in 2023. Hence, Tesla can sell a Model 3 for $43,490 (or $36,000 with a tax credit) and make a profit.
I don’t know how much farther Tesla’s production costs could fall, but if they drop to $25,000. Tesla could sell a vehicle for $30,000 ($18,301 cheaper than average) and make a profit.
This business model is not new. In the early 1900s, Henry Ford used cheap production and low prices to dominate the auto business. Like Elon Musk, Ford built gigantic factories that churned out thousands of cars of at low prices.
Henry Ford put America on wheels with cheap cars such as the Model T. Musk is electrifying America’s vehicles using Ford’s business plan. Ford became America’s dominant automaker for a generation with this strategy.
How Tesla could dominate Fleet Vehicles
Such low prices allow Tesla to steal lucrative fleet accounts. For example, Hertz Global Holdings (HTZ) took delivery of 48,344 Model 3 cars for its rental fleet. Hertz executives hope to receive all of a 100,000 Tesla order by the end of 2023, Elektrek reports. Hertz is also buying Model Ys.
Fleets are an important part of the auto business because they represent a steady market for basic vehicles. Importantly, fleet buyers keep purchasing vehicles during economic downturns.
Large fleet customers include governments, big corporations, taxi operators, and rental car companies. Fleet operators are eyeing Teslas because they are cheaper to operate.
Some police departments report big savings from Model 3 patrol cars, Insideevs claims. For example, it cost the Westport, Connecticut, Police Department $12,800 a year to operate a Model 3 for four years and $44,300 to operate a gasoline burning Ford Explorer for four years, Elektrek estimates.
Lower Operating Costs
Hence, Tesla could dominate fleet sales by offering cheaper vehicles with lower operating costs. Electric vehicles (EVs) have lower fuel costs and require less maintenance than internal combustion engine vehicles. EV maintenance costs are lower because they have fewer moving parts that can breakdown.
Another key selling point for EVs is higher fuel prices. AAA estimates the national average for a gallon of regular gasoline in the United States on 11 February 2023 was $3.434. Similarly, the average price for a gallon of diesel fuel was $4.571. Last year gasoline prices rose to $5.016 a gallon and diesel prices hit $5.816 a gallon.
Fuel prices are higher in some areas. It cost $4.639 for a gallon of gas and $5.688 for a gallon of diesel fuel in California on 11 February 2023. It is easy to see why fleet operators will switch to EVs. Replacing fuel with electricity can save them a fortune.
Tesla’s Impressive Growth
Tesla (TSLA) is experiencing impressive growth. For example, Stockrow estimates Tesla’s revenues grew by 37.24% in the quarter ending on 31 December 2022.
However, the revenue growth fell from 64.92% in the quarter ending on 31 December 2021 and 55.95% in the quarter ending on 30 September 2022. Tesla’s quarterly revenues grew from $17.719 billion on 31 December 2021 to $21.454 billion on 30 September 2022 to $24.318 billion on 31 December 2022.
Tesla’s profits and income are growing. For example, the quarterly gross profit grew from $4.847 billion on 31 December 2021 to $5.777 billion on 31 December 2022. Similarly, the quarterly operating income grew from $2.613 billion on 31 December 2021 to $3.901 billion on 31 December 2022.
The cash and value are increasing at Tesla (TSLA). Its cash and short-term investments grew from $17.07 billion on 31 December 2021 to $22.185 billion on 31 December 2022. Tesla’s total assets grew from $62.131 billion on 31 December 2021 to $82.338 billion on 31 December 2022.
How Much Cash is Tesla (TSLA) generating?
Tesla (TSLA) generates less cash. The quarterly operating cash flow fell from $4.585 billion on 31 December 2021 and $5.1 billion on 30 September 2022 to $3.278 billion on 31 December 2022.
Moreover, the quarterly ending cash flow fell from $1.145 billion on 31 December 2021 to -$3.225 billion on 31 December 2022. The quarterly ending cash flow rose to $18.04 billion on 31 March 2022. Tesla can generate enormous amounts of cash.
Impressively, Tesla has less debt. Tesla’s total debts fell from $7.202 billion on 31 December 2021 to $3.584 billion on 31 December 2022. Consequently, Tesla’s debt payments are lower. Its quarterly financing cash flow fell from -$1.257 billion on 31 December 2021 to -$485 million on 31 December 2022.
Thus, Tesla offers some strong value characteristics. To explain, Tesla has more cash, less debt, and more value.
Importantly, Tesla can discount its products which allows the company to grow markets. Thus, I consider Tesla a value investment at the $194.64 Mr. Market paid for it on 13 February 2023. I predict Tesla will grow and make more money as its production costs fall.
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