A few months ago I warned that price Cuts were coming to Tesla vehicles and to be prepared for that happening. Well, I can tell you one thing: Wall Street wasn't prepared Tesla just cut the prices of their vehicles in China with for example, the Tesla Model y seeing a price cut from about 42 100 US dollars down to thirty Seven Eight Seventy five. that is a price cut exceeding at 10 and it's basically mirroring now a seven to eight percent price cut in the stock as Wall Street continues to be concerned that price Cuts in a recession are a sign not of deflationary price fighting. but instead of demand concerns for Tesla and a potential margin squeeze in this video, we've got to talk about that demand concern.

We'll talk about a commodity pricing and margin. We'll also talk about one of Tesla's big competitors, Byd first. I Want to mention that: Thank you Tesla for finally reintroducing the steering wheel option to the model S and X Now, while I personally am a big fan of the Yoke steering wheel, I think that in order to get new and a broader audience of individuals buying Teslas outside that core demographic of about 25 to 55 year old dudes, historically higher income dudes White Collar dudes and dudes with um, let's just say a little bit of a tech background, it's time to expand the audience to women and to people outside that age range. And I personally think one of the best ways to do that is by having a traditional steering wheel option.

And so thank you Tesla for introducing the steering wheel option. back to at least the S's and X's Now don't get me wrong, I Understand that the yoke is great for FSD visualization. but again, if you're trying to transition people from a legacy car to a Tesla, so don't change so much and so sticking with the steering wheel. In my opinion, a great option for people.

So now you can choose do you want the Yoke or the steering wheel? You know people can switch to the Oak in their second or third Tesla. All right. But we need to talk about Byd and Margin because after all, China is uh, creating some issues for Tesla. We know this.

That's because China is probably in a deep dark depression right now. It's so bad that China is now lifting and reducing their three red line rule for Real Estate because they have destroyed the market by implementing the three red line rule, destroying real estate developers employmenting property values by over 40 percent. That has led to a massive decline in consumer spending in China and a massive decline in people needing to purchase vehicles in China, especially since a lot of people are stuck at home sick or dying from, well, the sickness going around. Now it's hoped that when China reopens, larger buyer demand will come back.

But wait a minute. Why does it seem like Tesla is seeing less competition for their vehicles? or I should say less demand for their vehicles While at the same time, Byd seems to be killing it with vehicle sales? Well, there are a few reasons here and we need to break those down. Number one is: 50 of Byd's electric vehicle sales are actually hybrids. Those are generally lower margin vehicles for a manufacturer.

Because you have two systems, you have the electric powertrain system and you have the actual Uh Ice system. the Legacy internal combustion engine system inside the vehicle. Byd, however, has performed pretty decently. even though the stock has had some hits over the last year.

Byd in just the last 30 days is up 8.5 percent, Most automakers are down 12, and Tesla is down over over 40 percent. And that's not even considering the big drop that Tesla is facing this morning. So what's up with Byd? Do they have all the pp that Tesla wishes it has? Does Byd have all of the pricing power? and Tesla has none? After all, what is pricing Power? If you have to drop your prices? See a lot of folks see pricing power as diminishing when prices are reduced and when prices are increased. Companies must have more pricing power, right? Because obviously, if you have less demand and you have to drop the price for a product, that means you have less pricing power, right? Well, the question is not that simple.

Generally, pricing power in stocks has to do with the combination of the price that you're able to sell a product for and the margins that you're able to preserve. So for example, if you go into a recessionary environment and every company drops their prices, what happens to margins for those companies? Which company is able to maintain margins as potentially the cost to manufacture products Falls And which company can actually maintain substantial profitability in the face of pricing? Cuts See, in a perverse way, dropping prices in a recessionary environment gives you that flexibility to increase demand. And if you can maintain margins while doing that because your costs are coming down, you could actually argue that you still have pricing power over your competitors. It's relative pricing power.

so preserving margin is a key dynamic in a pricing competitive environment. Every company raises prices when there's inflation, but who can actually succeed the most when you start getting into a deflationary competition? Well, this is where I Think it's worth looking at the Byd earnings report ending June 30th, which is the last six month report that we get from Byd. And what's fascinating in the last Byd earnings report is their gross profit margin. Byd's gross profit margin versus Teslas.

Keep in mind Tesla's gross profit margin sits in excess of 25. At one point last year, it was in excess of 30 percent without energy credits. That's incredible. What's Byd's gross profit margin? Well, Byd's gross profit margin is 5.3 percent.

That means Tesla has nearly five times the gross profit margin as Byd. That means even if Tesla's profit fell in half, while Tesla is dropping prices, Tesla would still be making two and a half times the profit per vehicle on a gross profit basis. As Byds, that is an example of bottom line pricing power, which ultimately is the most important aspect for stocks because stocks are generally valued off of earnings per share. So what about that net income number? Well, Byd brings a total of their top line revenue to bottom line of 1.45 percent.

Tesla brings about 13 percent to the bottom line. So now when we look at nominal prices, that is how much is a vehicle actually selling? For sure we could take a simplistic approach and say Tesla must not have pricing power because they're dropping prices. but in a recessionary environment, Can Tesla maintain the substantial margin lead that it has over the competitors to where they can actually spur demand while still actually making a lot of money. In my opinion, pricing power for a company diminishes when they actually see their margins fall to what industry Norms are.

And when you look at Byd, Ford or GM especially Ford who loses money on electric vehicles? margins aren't that great. Tesla has the margin game figured out And so they have the luxury of reducing prices while maintaining margins. But will they maintain margins? Well, that's going to be revealed in the next earnings report from Tesla but we have a little bit of insight light into at least commodity pricing and valuations of various different companies. So let's consider commodity pricing.

for a moment. Commodities: They're trending down, but they're not trending down as fast as we'd like. So yes, there is a potential risk for margins at Tesla, That would be a reduction of pricing power. Look at the Bloomberg Commodities Index, for example.

You could see the covid dip. This is a five-year chart. You could see the Cova dip there in March of about 2020. But if you look at the Bloomberg Commodities Index well, it has fallen substantially from a level of about 135 to about 107.

Right now, that is a decline of about 20.8 percent. It's still substantially higher than where we saw the Bloomberg Commodity index in the year of 2021.. Notice how in 2021, the Bloomberg Commodity index sat between 85 and about 100.. now we're sitting at 107.

So we're still about 7 to 15 percent more expensive than where we sat in 2021. However, wait a second. If the prices of Tesla vehicles like the Model Y, just fell to about 37 8 from 42 in their second price cut in China, We've got price cuts of somewhere between 10 to 15 percent for vehicles in China. Well, the Commodities index is down from its peak at the beginning of 2022, where Tesla was actually raising prices for vehicles in China by over 20 percent.

So even though it's not plummeting, it's actually falling faster. that is, commodity prices are falling faster than Tesla's sales prices are falling. So that actually does create some hopium that maybe margins could be maintained. But there is a risk and that's a risk that Tesla actually has to kind of shoot ahead of the Running Deer that is Tesla you think about it, signs up for contracts for Commodities and so that could create a lag for when they might actually realize the margin benefits of falling commodity prices.

What if Tesla is locked in some higher prices for longer and it takes longer to actually see that margin? Improvement Well, in that case, yes, you would expect to see Tesla margins hit. Then it just becomes a question of how bad does it get compared to the other companies. But a demand concern here in my opinion, isn't really the big concern because again, you want to be looking at companies that have the levers to adjust pricing while still maintaining profitability. That's important.

Compare the valuation. Now because we've looked at the profitability of Byd, compare the valuation of Byd to Tesla Byd in their earnings. Uh, Ending their six-month earnings. Uh, per share.

Ending in June of 2022, they only had 4.1 cents of Eps. Now their forward estimate is better. They're expected to sit at about a buck 10 for earnings per share in 2023.. Well, at a buck 10 for EPS In 2023, You're looking at a company with about a P E ratio of 50.

EPS might be growing from these small numbers by about 50 percent. Kind of like Tesla year over year. That would put the Byd PEG ratio at about one. Now Tesla has an EPS forecast of about 5.1 for the same period.

That puts them at a P ratio of about 20.. And if Tesla's EPS growth rate instead of being 50 is just 40, Tesla's valuation is half as expensive as Byds on a PEG ratio basis. Said another way: Tesla's half as expensive as Byd. Or in another way again, Byd is twice as expensive as Tesla right now with margins of 1.4 percent net.

So you're invest if you're investing in Byd because that's a stock that's gone up, whereas Tesla is a stock that's gone down. You're paying twice as much money for growth at Byd and you're investing in a company that actually doesn't have a lot of room to cut prices because again, they're only bringing 1.4 percent to the bottom line versus Tesla's 13. And when you consider the fact that Tesla has the you know margin of safety, potentially of insurance and FSD which isn't even really being considered in these numbers yet, it is, to some degree, but not as much. you potentially have a company that sets itself up for an explosive stock performance once.

Wall Street gets over this idea of demand concerns and of course, a downward Trend Because don't get me wrong, Tesla has been the easiest stock to short. Tesla is a stock that has essentially been straight down since November of two thousand 11. All you have to do is short Tesla and you make money In this market, the trend is down for Tesla. That's very clear.

You have to be insane to think the trend is not down. You make the most money shorting Tesla right now, and that's okay. That doesn't change The fundamentals though. And the fundamentals are that Tesla is substantially more profitable than Byd.

It sells for half the valuation of Byd, and it's likely to grow at a substantially higher Pace relative to its competition, even in a recessionary environment. However, don't get me wrong, recessions are hard and all you have to do is look at a company like Winnebago To see that when you get into environments like this, you are expecting deflationary fights. Look at page 13 of the earnings call for Winnebago and they right here. You could pause on this and you can read it and you can see how they're implying a deflationary flight coming or fight coming.

That same thing, in my opinion, is likely to happen in auto manufacturers. However, the real test of which company has pricing power will be which company can reduce prices and maintain massive profitability above the competition. Here's why: imagine Byd: Ford GM All have to cut their prices and Volkswagen all have to cut their electric vehicle prices to compete with Tesla price Cuts Now those companies potentially go into Nega negative cash flow and negative earnings because they've cut prices just to sell their inventory and now they're in a negative earnings position Tesla might have lower margin, but they might still be in a situation of substantial profitability that then leads the competition to produce less electric vehicles because every electric vehicle they produce Burns money for them. That enables Tesla to actually eat more market share while the competition shrinks.

So from a fundamental point of view, what's happening at Tesla is totally normal Justified and expected from a trend point of view. Tesla's going to zero I Hope this helps you with some insight. Look at the valuations and profit margins at these companies. Pay attention to them.

It is critically important. Thank you so much for watching. If you like my content, please consider sharing the video and subscribing and we'll see you in the next video. Goodbye.