The price reduction effect is no longer obvious, should Tesla advertise?

Tesla may need to advertise, as it seems to be increasingly obsessed with price cuts, which may be a more effective way to boost demand. And this may boost the stock price.

Diminishing Price Effect

In 2023, Tesla lowered car prices several times worldwide, helping the company increase its market share in the US, China, and Europe in the first quarter compared to the fourth quarter of last year.

But now the stock price has fallen about 25% from its February high, in part because investors are beginning to question the effectiveness of price cuts.

"Every time Tesla Model Y drops by $1,000, Tesla loses $500 million a year," said Gary Black, co-founder of Future Fund.

He is an advocate of Tesla advertising.

How Should Tesla Advertise?

Black said: "Use one-tenth of it for educational advertising to promote the popularity of electric vehicles. Advertising can focus on charging, vehicle performance, maintenance, and fuel efficiency. They can also address the concerns of first-time electric vehicle buyers, such as charging and environmental benefits."

Tesla cars are now cheaper than many non-luxury cars, and with tax deductions, their prices are cheap enough.

A standard Model Y starts at about $47,000, which is lower than the average transaction price of a new car in the US and can also enjoy a $7,500 purchase tax deduction, with additional incentives in some states.

Advertising Doesn't Require Price Cuts

Black is not the only one considering advertising.

Bernstein analyst Toni Sacconaghi asked, "Why hasn't Tesla seen greater price elasticity?"

Price elasticity refers to the change in demand with price changes. Ultimately, the impact of more price cuts on sales is becoming smaller and smaller. This is the dynamic he believes Tesla is experiencing.

Sacconaghi believes there are three ways to stimulate demand without lowering prices, and advertising is one of them.

The other two are incentive-based. He suggests providing free full self-driving software for a period of time or providing free charging incentives for a period of time.

Wedbush analyst Dan Ives believes that competition is another reason to consider advertising. "Tesla needs to change its marketing strategy, although Tesla has a huge leadership position, it is no longer the only game player."

Institutional Views

Sacconaghi is bearish on Tesla, with a "sell" rating and a target price of $150.

Ives has a "bullish" rating, a "buy" stock rating, and a target price of $215.

Pierre Ferragu, an analyst at New Street Research, is more optimistic about Tesla, with a "buy" rating and a target price of $300. But he doesn't like this advertising idea. "He believes that price reduction is effective and the right choice at present." "Any penny Tesla spends on advertising now is a waste for the company, investors, and customers."

It's hard to say what Tesla thinks of advertising. Perhaps Musk is not completely against it.

Canaccord analyst George Gianarikas said, "I don't think Elon Musk is firmly against advertising." He rated Tesla as "buy" with a target price of $257.