Tesla Sinks as Price Cuts Signal a Ceiling for Costly Models

(Bloomberg) -- No sooner did Elon Musk put a raucous 2018 behind him than a new worry erupted for Tesla Inc.: a potential ceiling in demand for its cars.

Tesla's shares plunged on the first day of 2019 trading after the company unexpectedly announced it was cutting prices by $2,000. The move, designed to partially offset a reduction in the federal tax credit for its electric vehicles, underscored the key challenge in what is likely to be a pivotal year for the company and its chief executive officer. The carmaker also reported fourth-quarter deliveries that fell just short of analysts' estimates.

The 63,150 Model 3s handed over to customers in the fourth quarter trailed the roughly 63,700 average analyst projection. Tesla said more than three-quarters of orders for the sedan in the year's final three months were from new customers, rather than reservation holders. That suggests many consumers are still waiting to buy versions of the vehicle at the long-promised $35,000 sticker price.

“This was a good quarter in terms of production ramp and strong underlying demand, but Tesla came up shy of bull expectations and this will be the focus of the street,” Daniel Ives, an analyst at Wedbush Securities, said in an email. “We also believe the $2,000 price cut to help subsidize the lower EV tax credit is a move that was not fully expected.”

Tesla shares fell as much as 10 percent to $298.80 as of 10:30 a.m. Wednesday in New York. The stock advanced 6.9 percent last year while most other auto manufacturers dropped.

The electric-car maker's 5.3 percent junk bonds due in 2025 were the biggest decliners in the market Wednesday morning. The bonds slipped 2 cents on the dollar to 85.5 cents, the largest drop since September, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.

It'll be a few more weeks before Tesla confirms whether it was profitable for a second consecutive quarter. But the company's ability to sustain a higher level of production -- it built 61,394 Model 3s and 86,555 vehicles total in the last three months -- will go a long way toward that goal.

Overseas Update

Musk said back in October that Tesla turning its attention to filling Model 3 orders in Europe and China early this year would help pick up any slack in demand once U.S. buyers lose the full $7,500 federal tax credit. But customers in those markets still have several weeks to wait, with the company now saying those deliveries will start in February.

Tesla fell just short of its target to deliver 100,000 of its more expensive Model S and Model X vehicles for the year, selling 99,394 units. Still, James Albertine, an analyst at Consumer Edge Research, said Wednesday's selloff represented an overreaction.

“The optics of this decision are weighing on shares, which is not surprising,” Albertine, who has the equivalent of a hold rating on Tesla shares, wrote in a note to clients. “To us, demand is not an issue, nor is EV competition to this point.”

--With assistance from Claire Boston.

To contact the reporter on this story: Dana Hull in San Francisco at dhull12@bloomberg.net

To contact the editors responsible for this story: Craig Trudell at ctrudell1@bloomberg.net, Kevin Miller, David Welch

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