Tesla cuts prices for 6th time this year on eve of Q1 earnings

Tesla Inc. cut U.S. prices for its best-selling Model Y crossover and entry-level Model 3 sedan on the eve of first-quarter earnings that post after the market close Wednesday.

Tuesday's price reductions on Tesla's most affordable models mark the sixth time this year the automaker has cut stickers on its four-vehicle lineup. The automaker also recently cut prices in Asia, Europe and the Middle East.

One of the key topics Tesla is expected to address on Wednesday's earnings call is how multiple rounds of price cuts will affect the automaker's industry-leading profit margins. Tesla is also expected to touch on this year's scheduled launch of the Cybertruck pickup and an update on in-house battery cell production.

In the U.S., the base Model Y starts at $48,630 with shipping as of late Tuesday, according to Tesla's website. The base is a new trim added this month. The previous entry trim, the Model Y Long Range, now starts at $51,630 with shipping. Before this year's price cuts that began in mid-January, the Model Y Long Range started at $67,190 with shipping.

The falling prices are more dramatic when the new federal tax incentive of $7,500 is added to the Model Y. Prior to Jan. 1, Tesla vehicles did not qualify for the previous tax credit because the EV maker exceeded a 200,000 vehicle quota in 2020. The new incentive has no quota but requires North American assembly and certain battery-sourcing requirements.

Tesla cut the U.S. price for the base Model 3 sedan on Tuesday by $3,000 to $41,630 with shipping. The base Model 3 qualifies for a tax break of $3,750 — half that of the Model Y — because it uses battery cells imported from China. The pricier Model 3 Performance trim qualifies at $7,500 because the batteries are sourced in the U.S.

Tesla last cut prices for the Model 3 and Model Y in early April. The automaker last reduced MSRPs on the Model S flagship sedan and Model X crossover in early March. Neither the Model S or Model X qualify for tax incentives because they exceed the $55,000 price limit for sedans and the $80,000 price limit for crossovers.

The latest round of price cuts is likely to bring additional drama to the company's Wednesday earnings call. Tesla CEO Elon Musk is expected to participate on the call. He has defended the price reductions this year to maintain Tesla's sales growth.

The EV maker likely sold 161,630 vehicles in the U.S. in the January-March period, according to Cox Automotive, for a 25 percent increase compared with a year earlier. But it was still far below Musk's 50 percent global growth target.

Tesla doesn't break out U.S. sales but reported global deliveries of 422,875 in the first quarter, a 4.3 percent increase compared with the previous quarter. The small quarter-on-quarter growth suggests that price cuts were necessary to maintain momentum amid rising EV competition.

At the same time, Tesla is expected to report auto gross margin of 23 percent Wednesday, according to a Visible Alpha survey of market analysts. A year earlier, Tesla reported a 33 percent gross margin, Reuters said.

In January, Tesla CFO Zachary Kirkhorn estimated that gross margin would not fall below 20 percent, which is still very healthy by industry standards. Tesla's stock price this year is up by more than 70 percent as of Tuesday's close.

Wedbush analyst Daniel Ives said in a Twitter post Sunday that the main focus of investors going into first-quarter earnings is "the margin structure of the business model." He added: "Auto gross margins north of 20 percent is the key."

Tesla already beat global sales expectations with first-quarter deliveries, Ives said, proving that the price cuts were a smart move by the automaker to defend EV share.

Morgan Stanley said in a research note Monday that it expects "a decent" first-quarter report from Tesla but warned that maintaining a minimum 20 percent gross margin could be challenging if price cuts continue.

"Our working assumption is that Tesla will continue its price cut campaign," said Morgan Stanley analyst Adam Jonas. He said the firm has heard from investors who forecast a range of gross margins from 17 percent to above 24 percent in the first quarter, including items such as software sales and lower lithium prices that could boost profitability.

Tesla has to keep up with growing competition and its own growing manufacturing footprint, meaning that it has to increase sales as new factories ramp up in Texas and Germany to prevent inventory buildup. Tesla also has expanded a plant in China, where the compnay's numerous price cuts have upended the market as well.