I wanted to discuss the ASPs as this Q2 earnings they are particularly important.
I was actually preparing this for my Q2, but I decided it was worthy of an episode to itself,
just to demonstrate how important all these price rises are, and how much they will impact
profit, albeit a stunted impact in Q2 due to the other fiascos.
I also doubt that this has been priced in.
We are going to explore the impact that Tesla's prices will have on the stock price, and profit,
and why it's such a big deal.
And bear in mind, everything we talk about in this episode is solely on the effects of
Tesla raising their prices.
The vehicles are of course too reducing in cost at the same time, well within time at
least.
So whatever we talk about here, will potentially be felt double as the price savings will be
that significant for the new factories once ramped.
GROSS PROFIT I wanted to go through what a big deal potentially
these price rises means for Tesla, and how they are felt a lot more at the bottom end.
In this video I will demonstrate what a 10% price rise in vehicles means to profit and
the company.
In the next video we will try and estimate the average price increases of each vehicle
from each factory, and see if we can also calculate an overall average, to get some
idea of how much impact this really will have in profits.
However, we won't know, because a lot of the profit is going to be absorbed by running
costs of the new factories and a dismal Shanghai result.
In fact in reality, it will take sometime until these price increases are actually felt
in the overall gross margin, due to the lower margin cars coming out of Texas and Berlin.
They will be lower margin until they start ramping up.
Then perhaps early next year they might be of equal margin with Tesla's other vehicles,
and then by the end of the year, we would expect the new factories to be producing the
highers margin vehicles, due to price increases and cost reduction.
Alright let's do some math to show you what I mean.
You see even at just a 10% price rise, a $50,000 car, will become a $55,000 car.
If that car previously carried 30% margin, then that was $15,000 gross profit per sale.
But now we have added $5,000 to the price, therefore that $15,000 gross profit well that
now becomes $20,000.
And that 30% margin, well that increases too, all the way to 36%.
A 20% increase in margin.
Which results in 33% more gross profit per every vehicle sold.
Now that is a good increase in gross profit, with very little effort.
OPERATING MARGIN
And if Tesla have an operating margin of around 20%, then that would be an operating profit
per vehicle of $10,000 at the old price.
But now we are increasing operating profit by $5,000, taking it to $15,000 operating
profit per vehicle, or a 50% increase.
Sure, this assumes no increased costs, but it also assumes no decreased costs either.
And still, even if there are some increased costs, they shouldn't be this high.
10% INCREASE Oh wow, something has just occurred to me.
I have often discussed Tesla trying to hit the sweet spots in various scenarios, and
one is pricing.
What did we just discover?
We just discovered here, that Tesla could have raised their prices by just 10%, and
it ends up resulting in a 50% increase in operating profit.
50% increase likely all the way to earnings.
Now when earnings increase 50%, and the p/e ratio remains the same, then the company valuation
increases, you guessed it 50%.
Now obviously a 10% price rise is definitely worth that increase in profit.
Even if it reduces demand by 20%.
Remember though, at the same time, Tesla are doing things to increase demand.
Adding additional service centers, superchargers, new features, longer range.
And of course Tesla have a buffer of demand in their waiting lists.
So I think Tesla are now trying to feel for the market, and get the right price points.
Teslas are tremendous products, but the quantity that Tesla want to sell, is not affordable
to that many at some of these prices.
There is simply a physical limit as to what some people can afford.
So Tesla can find various ways of doing what they can to get people into Teslas.
I mean not that they even need to now anyway.
But for example like software limiting models to make them lower cost.
Or something I've suggested in the past - a 10 year financing option.
Actually, let me know if that would make you buy a Tesla, perhaps payment of about $500
a month, for 10 years.
It has to be starting to get close to gasoline costs.
Especially in places like Europe.
Then even a further $1000 a year saved in oil changes, and Tesla insurance.
There comes a point in savings where the Tesla is a free upgrade from what a lot of people
are currently driving, which may not even be close to as nice as a Tesla.
Again, just so many other opportunities with this company, to stimulate more demand if
they needed.
The obvious one being advertising.
Really, so few people actually understand electric cars, or the difference between a
Tesla.
I'm afraid we do indeed live in an echo chamber.
But that's a good thing, as we know the industry is growing at rapid rates.
We know its the future, and we know it will grow, despite most people still being dubious.
Anyway, whatever advertising Tesla did, even if it cost as much as $1,000 per vehicle,
I am sure it would be used efficiently and effectively.
DEMAND It seems unbelievable, but it sounds like
even Tesla and Elon are some how continually under estimating Tesla's demand.
I would assume they would be do some sort of marketing research to calculate demand
in order to establish pricing models, but it appears to keep coming under the real results.
For starters who would have a thought a $60,000 vehicle would have so much demand, it would
be the most sold vehicle in the world.
Well I don't think Elon or Tesla did, hence they they thought they had to release a $25,000
vehicle, until they realized just how popular Tesla is, and is going to be.
Not only that, they also under estimated their demand for the Model Y from Down Under.
The Australia waiting list just about doubled once they started offering the vehicle.
And get this, they aren't even selling the Long Range, you know the most popular variant
sold in the US.
Yea, that isn't even for sale in Australia or New Zealand.
Perhaps preserving 2170 cells for elsewhere.
MORE Oh, and wait there's more.
Yes, it's unbelievable, whenever I make these kinds of videos that blow our minds about
how profitable Tesla is, I can always manage to find reasons as to why Tesla will be even
more amazing.
Because Tesla is simply that profitable with that much potential.
So here it is, and I know it's obvious, but so what, it's still going to blow our minds.
Just taking a cross section of some months since the Model Y was launched, and watch
how the price has increased over time.
As we can see that before the latest massive price increase that the prices had still increased
in excess of 10%.
Also that's an increase from Tesla's launch price, when the car was actually being delivered,
the price before then was even lower again.
But it's this latest price increase that we can clearly see is the biggest.
That is simply a huge amount of additional profit margin to come from that increase.
In fact it's actually a 30% increase from the very first price listed.
And we just based all our numbers on what impact 10% increase would have.
One would assume that Tesla were indeed able to make a profit with the Y even when it was
jut $51,000.
Tesla didn't have so much of a name or consumer confidence back then.
They had to entice customers with extremely low prices first.
Until consumers realized how incredible a product Tesla was offering, and then Tesla
were able to price the product closer to its true value.
This is one of the disadvantages of not advertising.
It was pretty much all achieved through word of mouth.
Oh and then potentially there is also about $15,000 more profit for range and performance
software unlocks, or at least eventually, for the Y.
Which would be a further 30% price increase.
Or about a 60% price increase from when the Y was for sale.
SUMMARY There is so much going for this company, there
are profits bursting out everywhere.
There is no shortage of opportunity for this company.
Tesla have managed to get costs of owning a car lower than any other ICE vehicle.
Now consumers are seeing the value, demand is increasing, and pricing is acting accordingly.
As value increases along with efficiencies, the discrepancy between cost and price will
continue to grow, or as we call it, increasing gross profit margins.