Tesla is cutting prices yet again, a clear sign that "demand hell" has set in for the embattled automaker, and that the weather in Shortsville may continue to be 85 degrees and sunny heading into the summer where Morgan Stanley now sees the "bear case" scenario for the stock as low as $10 per share.
Perhaps Tesla has finally figured out that there is simply not enough demand for its cars at the current price point, or worse, that its business model isn’t sustainable, resulting in what has been a 2019 full of business model changes, price cuts and employee layoffs.
On Tuesday morning, electrek reported that Tesla had again lowered the base price on its Model S and Model X vehicles. The company's demand issues were highlighted on Tuesday morning in a Morgan Stanley note that saw former Tesla uber-bull Adam Jonas lower his worst case price target for the the company to a paltry $10.
Tesla brought back a ‘Standard Range’ option for both vehicles as a part of the cuts. Tesla has reportedly updated its online configurator to reduce the price of the Model S and Model X by $3,000 and $2,000, respectively. This represents the third price cut in three months for these models.
Bizarrely, the company's attempt to fine tune the equilibrium price only took place after a modest price hike which was immediately reversed: Reuters reported that according to a Tesla spokesman "Last week, we raised U.S. Model 3 prices by 1%". Shortly after, the company cut prices.
In any case, the company still has not consistently offered a $35,000 base model for the Model 3 on its website and the vehicle can reportedly only be ordered by going into a store or calling the company. Recall, the promise of a $35,000 Model 3 with a full EV credit is how Musk drummed up "420,000" Model 3 reservations more than 3 years ago.
Tuesday morning's MS note saw Jonas ponder if a collapse in the company's stock price could become a self-fulfilling prophecy among counterparties and employees. He also called into question the year's "sharp deceleration in demand":
We have long held that Tesla’s share price performance is driven by: demand for its products, ability to generate cash flow, and access to capital markets. This year’s sharp deceleration in demand has led to a substantial curtailment of the company’s ability to self-fund through free cash flow generation, at the margin potentially impacting the firm’s access to capital. Tesla’s recent $2.7bn equity and convertible debt raise may provide an extra year of liquidity to run a business of this size and cash consumption. However, Tesla may now find itself in a cycle where a lower share price may itself contribute to a potential deterioration of employee morale as well as potentially increased counterparty risk with both customers and business partners (suppliers,governments)... potentially further impacting fundamentals.
He then reminded the Musk collective of the importance of demand, or lack thereof, saying it is "at the heart of the problem" and adding that the company may have over-saturated the market outside of China:
We believe Tesla may have over-saturated the retail market for BEV sedans outside of China. Tapping into new demand could require aggressively expanding into: 1) the Chinese domestic market, 2) lower-priced SUVs, 3) and logistics/mobility fleets. Tesla is a large and highly vertically integrated company, capacitized to build between 500k and 1 million units annually. In our opinion, Tesla has grown too big relative to near-term demand, putting great strain on the fundamentals.
The timing of Tuesday morning's Morgan Stanley note seems to be prescient. After all, price cuts are generally only offered when a company that is trying to spur more sales and move inventory. Even the pro-Tesla propaganda at electrek couldn't help but admit that "...it’s also becoming difficult to navigate Tesla’s price structure because it changes so often."