Tesla's Year-End Push: Incentives to Drive Sales

As the year comes to an end, Tesla is facing the challenge of meeting Wall Street's expectations for a record quarter. With higher interest rates and increased competition in the electric vehicle (EV) market, selling nearly half a million cars won't be an easy task. However, Tesla has found a new approach to boost sales: incentives.

Tesla is offering attractive incentives on its inventory of vehicles. Buyers can enjoy a discount of almost $4,000 on select Model Y vehicles, along with six months of free supercharging. The value of the charging benefit alone can be worth approximately $900 or more, depending on the driver's charging habits.

In total, these incentives can amount to over 8% of the transaction price. In comparison, the average incentive on new U.S. car sales in October was around 5% of the transaction price, according to automotive data provider Kelly Blue Book.

It's worth noting that Tesla's average incentive levels are actually lower than 8%. This is because most Tesla vehicles are ordered directly from the company's website with specific configurations, reducing the need for additional incentives.

Incentives offered by the U.S. auto industry have been steadily increasing over the past few months. Historically low levels at less than 3% of transaction prices were observed throughout much of 2022, down from about 9% in October 2022.

Tesla's incentives now span across its entire vehicle lineup. In some cases, incentives on certain Model 3 vehicles can reach almost 10% of the price, including the added benefit of free charging. Moreover, Tesla is providing a $1,000 discount on Model S and X vehicles to select Cybertruck reservation holders.

For those customers who have reserved a Cybertruck and will have to wait until 2025 for its delivery, this offer presents an enticing alternative.

In conclusion, Tesla is strategically utilizing incentives to drive sales during this crucial period. By offering discounts and additional benefits, the company aims to captivate potential buyers in the face of tougher market conditions.

Tesla's Bounceback Quarter

Tesla is aiming for a strong recovery in the coming quarter, following a dip in vehicle deliveries during Q3. While they delivered approximately 435,000 vehicles in Q3, down from around 466,000 in Q2, Wall Street is expecting about 475,000 units in Q4 - a potential company record.

Unfortunately, Tesla fell short of expectations in Q4 of 2022, delivering around 405,000 units instead of the estimated 420,000. As a result, the stock experienced a considerable drop of more than 12% on the first trading day of 2023. These sluggish delivery numbers were also an early indication of impending price cuts for the year.

One example of these price reductions can be seen in the Model Y performance version. In late 2022, it had a starting price of approximately $63,000. Presently, it is available for purchase starting at about $52,500.

Despite these price adjustments, Tesla's stock has managed to withstand the impact. Starting 2023 at around $123 per share, it did experience a decline to nearly $100 per share after the disappointing delivery results and subsequent price cuts. However, as we enter the week, shares are valued at close to $244 each - reflecting an impressive increase of over 100% from their 2023 lows. Such a strong performance heightens expectations for the upcoming Q4 delivery figures, which are typically reported on January 2nd.

Once the delivery numbers are analyzed, investors will focus on assessing the impact of higher incentives on profit margins. In Q3, operating profit margins stood at 7.6%, marking a decrease of almost 10 percentage points year over year.

Wall Street anticipates that operating profit margins in Q4 will improve to about 9%. Yet achieving this while dealing with rising incentives poses another major challenge for Tesla.