Why Tesla Stock Keeps Driving Higher

What happened

For the third day in a row, Tesla (TSLA 7.08%) stock is riding higher — up 4.3% as of 10:10 a.m. ET. The Federal Reserve’s decision to raise interest rates only 25 basis points yesterday is probably part of the reason for that — indeed, growth stocks in general seem happy to run today, with the entire Nasdaq up nearly 2%.

But the other reason is China.

So what

Specifically, Shanghai.

And even more specifically, Tesla’s electric car Gigafactory in Shanghai.

Tesla’s plan to cut the prices of its electric cars, you see — not just in the U.S., but in China as well — is having its intended effect of stoking consumer demand. As Reuters reported yesterday, Tesla is ramping up production of its popular Model 3 and Model Y EVs in Shanghai. Over the next two months, Tesla expects to grow Shanghai output to nearly 20,000 vehicles — putting the factory on course to produce more than 1 million vehicles this year.  

Thus, it seems that Shanghai — both Tesla’s most prodigious producer of EVs, and its most profitable — could all on its own account for half of Elon Musk’s goal of delivering 2 million cars to consumers this year.

Now what

Now, it still remains to be seen how profitably Tesla can produce so many cars — especially after cutting the prices it charges for those cars. In China alone, Tesla has slashed prices by as much as 24% since September, reports Reuters. In the U.S., Tesla shocked stock markets, and its competitors, by cutting prices as much as 20% in January.  

As a math problem, that may have some implications for Tesla’s profits.

Tesla generated $81.5 billion in revenue in 2022. Were it to cut prices across the board by 20% — on all models, of all cars it produces, as well as its home batteries, solar panels, and so on — then you’d expect the money Tesla brings in from its sales to fall by about $16.3 billion per year, wiping out Tesla’s $13.7 billion 2022 profit in one fell swoop.

The good news, however, comes in three parts: First, Tesla is not cutting prices by 20% across the board, but only cutting prices on some models, and only cutting prices by 20% on a subset of those models. Thus, the revenue hit won’t be as bad as $16.3 billion.

Second, Tesla just said it’s selling more cars this year than last year — and this, too, means more revenue for Tesla.

Third and finally, Tesla has stated that one reason it’s able to cut prices is that its cost of producing cars is falling, and the company wants to “pass this relief onto our customers.” This may enable Tesla to both lower prices and keep earning profits regardless.

Unless Tesla’s competitors can figure out a way to duplicate this trick, it’s going to be awfully hard for them to compete with Tesla this year.  

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.