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A few months ago, I warned that the prices of Tesla vehicles were going to drop. About being prepared for that to happen, well, I can say one thing . Wall Street is not ready. Tesla has lowered the prices of its vehicles in China, for example, the price of the Tesla Model Y has dropped from around $ 42,100 to $37,875 .
This is a price reduction of more than 10% and it is now reflecting a 7 to 8% drop in the stock market . Wall Street is concerned that price cuts during a recession are not a sign of a price war, but rather a sign of demand concerns and the possibility of margin squeeze for Tesla . In this video, we need to talk about that demand anxiety .
Let's talk about commodity prices and margin . Let's also talk about BYD, one of Tesla 's biggest competitors . First, I would like to thank Tesla for reintroducing the steering wheel option in the Model S and X vehicles . While I'm a big fan of the Yoke steering wheel, I think Tesla should be seen as a more inclusive choice for people, not just men between the ages of 25 and 55 , those with higher incomes , white- collar workers, and people with technical backgrounds .
Now it's time to expand Tesla to women and other age groups as well. I personally think the traditional steering wheel option is the best way to go . So, thank you Tesla for bringing back the steering wheel option, at least on the S and X models. Do n't get me wrong, I know the yoke would be good for FSD visualization, but when switching from older cars to Tesla , it's best not to make major changes.
So I think continuing with the steering wheel is a good option for people. Now you can choose whether you want a yoke or a steering wheel. People may switch to yoke steering on their second or third Tesla . Okay. But we need to talk about BYD and margin because China is causing some problems for Tesla.
We know this. Because China is currently in a severe economic recession . The situation is so bad that China is now relaxing their three red line rule for real estate , because they destroyed the market with this rule, hurting real estate developers and reducing property values by more than 40%. This has led to a huge drop in consumer spending in China, as well as a significant drop in the number of people buying vehicles.
This is mainly due to the fact that many people are confined to their homes due to illness or are dying from the spreading epidemic . Now, as China reopens , buyers are hoping demand will pick up again . But wait a minute, why does it seem like Tesla vehicles have less competition? Or should we say that demand for Tesla vehicles is low , while BYD vehicles are booming in sales.
Well, there are some reasons behind this , we need to analyze them . First, hybrid vehicles account for 50% of BYD 's electric vehicle sales . These are generally vehicles that give manufacturers less profit , because they involve two systems . One is an electric powertrain system, and the second is an ICE system, which is an old- fashioned internal combustion engine system.
Despite some setbacks in the stock market last year , BYD's performance has been very good. BYD stock has risen 8.5% in the last 30 days alone. While most automobile company stocks fell 12% , Tesla lost more than 40% . And this is the situation even if we don't take into account the massive fall Tesla is facing this morning.
Okay, what's the real deal with BYD? Does Tesla have all the pricing power they want ? Does BYD have all the pricing power ? And Tesla has nothing? Actually, if you have to lower prices, how can you call that pricing power ? See, when prices are lowered, many people feel that pricing power has been reduced .
And when prices are raised, companies should be assumed to have more pricing power, right? Because if demand is low and you have to lower the price of the product , it means you don't have pricing power, right? Well, this question is not that easy. Generally, pricing power in the stock market depends on the price you sell the item for and the profit margins you can maintain .
For example, if an economic recession occurs and every company lowers their prices, what will happen to the profits of those companies ? Which company can maintain profits even when production costs are falling, and which company can maintain significant profits even when prices are lowered? Look, it may sound strange, but lowering prices during a recession gives you the opportunity to increase demand.
If your production costs also decrease when you lower prices, you can argue that you have more pricing power than your competitors while still maintaining profits. This is relative pricing power. Therefore, maintaining profits is a key strategy in a market where price competition is high. Every company raises prices when there is inflation, but who can win the most when the deflationary competition begins?
Well, I think it's appropriate here to take a look at BYD's earnings report for the period ending June 30, which is the last six-month report we've received from BYD. And the surprising thing about the last BYD earnings report was their gross profit margin. BYD 's gross profit margin and comparison with Tesla.
Keep in mind that Tesla's gross profit margin is more than 25% . At one point last year , it was over 30% without energy credits . That's unbelievable. What is BYD's gross profit margin? Well, BYD's gross profit margin is 5.3% . That means Tesla has a gross profit margin that is almost five times higher than BYD.
This means that even if Tesla's profit falls by half when it cuts prices , Tesla still makes 2.5 times more profit than BYD on a gross profit per vehicle basis. This is an example of bottom line pricing , which is ultimately the most important factor for stocks, as stocks are typically valued based on earnings per share .
Okay, what about that net income number ? BYD converts only 1.45% of its total revenue into net profit . Tesla turns about 13% into net profit . Now when we look at nominal prices, we see how much a vehicle is actually selling for. Sure, we might assume that Tesla doesn't have pricing power because it's cutting prices.
But in a recessionary environment, can Tesla maintain its significant margin lead over its competitors , allowing them to grow demand while still making more money? In my opinion , when a company's margins fall below industry standards , that company's pricing power decreases. And when you look at BYD, Ford or GM , especially in the case of Ford, which is losing money on electric vehicles, the margins are not that great.
Tesla knows how to play the margin game, so they have the flexibility to lower prices while still maintaining margins. But can they maintain margins? Well, that will be revealed in Tesla's next earnings report , but at least we have some understanding of commodity prices and the valuations of various companies .
So, let's look at commodity prices for a moment. Commodity prices are falling , but not as fast as we might expect . So, yes, there is a potential risk to Tesla margins. That indicates a decrease in pricing power . Take the Bloomberg Commodities Index for example. You can see the decrease during Covid.
This is a 5- year chart. You may have noticed a drop in sales due to COVID in March 2020. But if you look at the Bloomberg Commodities Index, it has fallen significantly from a level of 135 to 107 currently . That's a decline of about 20.8% . This is still significantly higher than the Bloomberg Commodity Index we saw in 2021 .
Notice how the Bloomberg Commodity Index hovered between 85 and 100 in 2021 . Now we are at 107. So we are still at a price point that is 7 to 15% higher than what we were at in 2021 . But, wait a moment. If the prices of vehicles like the Tesla Model Y in China drop from 42 to 378 in the second price cut, we will get price cuts of 10 to 15% on vehicles in China.
The commodities index has declined from its peak in early 2022, when Tesla raised vehicle prices in China by more than 20% . So even if it's not falling as fast, commodity prices are falling faster than Tesla's selling prices are falling . So this gives some hope that margins can be preserved. But there is a risk, which is that Tesla will have to shoot before the deer runs away .
That means you think Tesla is making deals for commodities. So while commodity prices are falling , it may take some time for them to really reap those benefits . What happens if Tesla negotiates at higher prices and it takes longer to see margin improvement? In that case, yes, you could see Tesla's margins take a hit .
Then the question arises as to how much worse it will be compared to other companies . But in my opinion the demand issue is not a big deal here, because you need to look for companies that have the power to adjust prices while maintaining profitability. That's important. Now compare the valuation, because we have seen BYD's profitability.
Compare BYD valuation to Tesla . According to BYD 's earnings for the six months ending June 2022 , their EPS was just 4.1 cents . Now their forward prediction is better. They are expected to earn earnings of one dollar 10 cents per share in 2023 . If EPS is a dollar 10 cents in 2023, you are looking at a company with a PE ratio of around 50 .
EPS could grow by about 50% per year from these small numbers, like Tesla . That puts BYD's PEG ratio at around 1. Now Tesla has an EPS estimate of around 5.1 for the same period . That puts their P ratio at around 20 . What if Tesla's EPS growth rate was only 40% instead of 50%. Tesla is valued at less than half that of BYD on a PEG ratio basis .
In other words , Tesla is half as expensive as BYD. Or to put it another way, BYD is currently twice as expensive as Tesla with margins of 1.4%. Net. So, if you are investing in BYD, it is a stock that has gone up, but Tesla is a stock that has gone down. You're paying twice as much for BYD's growth , and you're investing in a company that has little chance of lowering prices, as they're only yielding 1.4% , compared to Tesla's 13% .
And considering the safety margin factors that Tesla has, such as insurance and FSD, they are not yet actually considered in these figures . Somewhat considered , but not very much. When Wall Street moves away from demand concerns and the idea of a downward trend , this company is likely to see a huge stock performance .
Because don't get me wrong , Tesla is the easiest stock to short. Tesla is a stock that has been basically continuously falling since November 2011 . All you have to do is short Tesla, and you will make money in this market. The trend seems to be falling for Tesla . That is very clear . Those who think the trend isn't going away are crazy .
You'll make more money by shorting Tesla right now . And that's okay. However, that does not change the foundation. And the basic point is, Tesla is significantly more profitable than BYD. It is being sold at half the price of the BYD . And it is likely to grow significantly faster than its competitors, even in an economic downturn .
But, do n't get me wrong, recessions are tough, and if you look at a company like Winnebago, you can expect deflationary struggles in an environment like this . See page 13 of the Winnebago earnings call. Here you can pause and read this and you can see how they are suggesting that a deflationary struggle is coming.
In my opinion, the same thing could happen among auto manufacturers . However, to determine which company has pricing power , one must look at which company can maintain a higher profitability than its competitors even while lowering prices. See why here. Imagine what it would be like if companies like BYD , Ford, GM, and Volkswagen had to lower the prices of their electric vehicles to compete with Tesla's price cuts .
Now, those companies are likely to go into negative cash flow and losses as they lower prices to sell their reserves, leaving them in losses. Tesla's profit margin may be down, but they are still likely to have significant profitability. This causes competitors to produce fewer electric vehicles , because every vehicle they make causes them a loss.
This will allow Tesla to gain more market share at a time when competitors are shrinking. So from a fundamental perspective, what is happening at Tesla is completely normal, reasonable, and predictable. From a trend perspective, Tesla is falling to zero. Anyway, I hope this gives you some insight . Take a look at the valuations and profit margins of these companies .
Focus on them . This is a very important thing. Thank you very much for watching. If you like my content , please share the video and subscribe . See you in the next video . Goodbye.
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