Tesla's Price Cuts May Be Paying Off

After it announced major price cuts to its vehicle prices earlier this year, some investors may have been worrying about whether Tesla's (NASDAQ: TSLA) orders were suffering during a tough economy. Whatever was happening to the order volume for Tesla's electric vehicles before the company lowered prices, there is good news this week about how these price cuts are impacting the company's order volume now. Tesla is reportedly seeing "unprecedented demand" for its vehicles in the U.S., according to electric vehicle news website Electrek's unnamed source, who is "familiar with the matter."

With demand for Tesla vehicles seemingly picking up, the company is well positioned for another year of strong growth. But can the automaker grow as fast as it did in 2022?

Demand trends

Last week, Tesla rolled out massive price cuts across its vehicle lineup in North America and Europe. This added to price cuts in China earlier in the year. One Tesla model saw price cuts as much as 20%.

The price cuts, of course, may have led some investors to conclude that demand for the company's vehicles has been weak. While this is possible, the more likely scenario is that orders for the company's vehicles weren't growing as fast as production. Tesla exited its third quarter building vehicles at record rates. Further, the continued ramp-up of production at new Tesla factories in Texas and Germany are positioning the company well to be able to continue growing its production rapidly throughout 2023. But what good would soaring production levels be without a sharp increase in sales this year? Lower prices could help stimulate enough demand to meet growing production rates.

Fortunately for Tesla shareholders, according to Electrek's source, lower prices are, indeed, driving a substantial uptick in orders for its vehicles. The source says orders for its vehicles have risen to record levels at many of Tesla's stores in the U.S.

Of course, lower prices mean that revenue will likely grow slower than unit sales in 2023. But this doesn't necessarily mean profits can't grow faster than revenue. A Tesla spokesperson in Europe recently told the media that price cuts reflected "a partial normalization of cost inflation."

Expect strong growth from Tesla in 2023

If there's any takeaway from Tesla's recent price cuts, it's that the company appears willing to do whatever it takes to continue growing its sales rapidly. This isn't too surprising considering the company has been building out significant production capacity in recent years. Further, Tesla's new factories in Texas and Germany have a long way to go before they are producing the company's target levels for the new factories. In addition, Tesla has an incentive to grow delivery volumes at its factories because that means fixed costs will be spread across a higher number of deliveries. In the company's third-quarter update, Tesla said its factories boasted the installed equipment to support annualized production capacity of up to 1.9 million vehicles. This means there's plenty of room for growth in production from the approximately 1.37 million vehicles the company manufactured in 2022.

Given Tesla's aggressive price cuts, reports of a surge in demand following these price cuts, and the company's installed production capacity, it wouldn't be surprising to see Tesla's deliveries grow as fast as they did last year. With deliveries soaring 40% in 2022, maintaining this growth rate in 2023 would be an incredible accomplishment.

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Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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