Electric Vehicle Stocks Take a Beating Following Tesla’s Price Cut

Amid another soft session for Wall Street, electric vehicle stocks in particular printed dour results, a direct consequence of sector leader Tesla (TSLA) and its decision to cut prices for its popular EVs. Committed to sacrificing profitability for extracting maximum sales, the move sparks a war of attrition. That might leave only a few players standing once the dust settles, presenting concerns for investors with wide exposure to EV stocks.

According to a recent AP report, “[p]rice reductions across the model lineup cut into Tesla's first-quarter net income, causing it to fall 24% from a year ago.” Specifically, the EV manufacturer revealed that “it made $2.51 billion from January through March, down from $3.32 billion a year ago. Revenue rose 24% to $23.33 billion, but the company's operating profit margin fell.”

In addition, the “net income drop came even though Tesla's sales last quarter rose 36% to a record 422,875 vehicles worldwide. That's largely because the average sale price per vehicle fell just over $5,000 from the first quarter of 2022 due to the price cuts. Analysts estimated that the average Tesla sold for $46,850 last quarter, down from $52,100 a year earlier.”

On Wednesday, TSLA stock dropped slightly over 2%. During the afterhours session, it slipped more than 3%.

However, Tesla wasn’t the only name among EV stocks to hurt. During the midweek session, shares of rival Rivian Automotive (RIVN) fell 4.54%. A few days prior, the Motley Fool warned that Rivian needs more money to support its long-term ambitions. Because of the heavy capital expenditures involved in the EV business, Rivian risks running out of cash.

Unfortunately, Tesla’s margin-pressuring move doesn’t help. Further, it sets up a pricing war that could leave many upstart EV stocks on the edge of implosion.

EV Stocks Symbolize a Warning to the Rest of the Economy

On paper, EV stocks really shouldn’t be hurting this badly. After all, while the labor market doesn’t always consistently generate outstanding numbers, it has remained resilient despite the pressure of the Federal Reserve’s interest rate hikes and the lingering effect of the COVID-19 pandemic. Basically, if anybody wants a job, they can get one.

More significantly, nobody seems to be talking much about last month’s bank runs that devastated two major U.S. regional financial institutions. To be sure, the federal government quickly moved in front of the problem, thereby stopping the spread of a possible contagion. On the other hand, every action has a reaction – but we just haven’t seen any real repercussions (yet).

Well, the red ink impacting EV stocks might be the first real sign of the consequences of fiscal and monetary excesses. In particular, Tesla’s aggressive price cuts underscore a desperation that we haven’t seen from the enterprise nor from the broader industry.

Let’s face it – Tesla has become a status symbol just as much as it is a legitimate automaker. Many people long, no, lust after Teslas, particularly the high-performance models. With myriad features and a robust and burgeoning charging network, the company couldn’t get more desirable in its core sector.

Nevertheless, despite its leadership position, Tesla felt compelled to cut its prices. That’s an ominous sign for many other EV stocks, which must respond in kind. Basically, only the enterprises that have access to ample capital can survive the attrition that’s about to take place. Therefore, aspirational EV makers face the real risk of bankruptcy.

At the same time, other segments of the economy do not enjoy an exemption. If people are going to cut back on making the pivot to electric mobility, they probably don’t have the funds for other serious expenditures, such as real estate.

In fact, the latest data from the housing market suggests that the usually busy spring season incurred a conspicuous slowdown in activity. With dwindling availability of consumer dollars, competition among EV stocks could become fiercer.

OPEC+ Provides No Tailwind

Vexing the Fed’s efforts to contain inflation was the decision by OPEC+ to implement production cuts earlier this month. The surprise move sent oil prices rising, thus negating the central bank’s initiatives to curb consumer price acceleration. Cynically, though, EV stocks should have benefitted.

Over time, owning an EV should be much more favorable to the wallet due to the lower costs charging an EV versus fueling a combustion-powered car. However, even with this compelling backdrop, Tesla still decided it was in its best interest to cut prices.

That’s a big clue that we’re not just talking about simple competitive pressures. Rather, a severely negative paradigm shift may have materialized, inspiring drastic maneuvers from a company that on the surface appears to have it all. Again, this isn’t just a warning for EV stocks but for the broader economy.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.