Tesla's price cuts signal demand weaker than stock suggests

Tesla Inc.’s overnight price cuts suggest the coronavirus is putting a bigger damper on demand than has been reflected in the electric-car maker’s share price.

The $5,000 reductions for the Model S and X and $2,000 cut for the Model 3 were an “acknowledgment that Tesla isn’t immune to material North American demand weakness," Craig Irwin, an analyst at Roth Capital Partners, said in a report Wednesday. (Full report on price cuts here)

“With the stock trading in the stratosphere," Irwin wrote, “the key question is, ‘Can Tesla continue to deliver an interesting growth rate in the US?’"

Credit Suisse’s Dan Levy said the discounts change the narrative around the company’s volume this quarter. Prior to the price cuts, investors were concerned demand would be limited by tight inventory. The company shut down production at its lone US auto plant on March 23 and rushed to reopen the facility -- initially without local authorities’ permission -- in mid May.

Chief Executive Officer Elon Musk tweeted at the beginning of the month that Tesla’s shares were trading too high in his view. While the tweet dragged down the stock on May 1, it advanced another 18% through Tuesday’s close. While analysts have speculated the company’s sales will hold up better than the broader industry, forecaster IHS Markit is projecting at least a 22% contraction in global auto deliveries this year.

“Price cuts are likely tactical and aimed at supporting demand in the U.S. in the context of today’s pandemic," Pierre Ferragu, the New Street Research analyst whose $1,100 price target for Tesla’s stock is the highest on Wall Street, wrote in a report. He said the Model 3, X and S “all have reached their full potential in the U.S."

Tesla erased earlier declines to trade up 0.2% to $820.66 as of 3 p.m. in New York. The stock has almost doubled this year.