Gary Black, a prominent supporter of electric vehicle giant Tesla, has been raising concerns about the company’s strategy. Black, a Chicago fund manager, has consistently held Tesla as his top or second-highest holding since he established his fund in 2021. He often takes to social media, and occasionally appears on CNBC, to express his support for the company. However, his recent focus has been on what he believes is Tesla’s inefficient spending on price cuts to maintain high growth rates.
As Tesla’s growth in unit sales of its electric cars and SUVs has faced challenges, and the launch of the Cybertruck pickup has been delayed, Black contends that Elon Musk, Tesla’s CEO, should reconsider the long-standing stance against major media advertising campaigns.
Rising Support for a Shift in Strategy
Black’s viewpoint has gained traction recently, particularly in the realm of social media, an arena closely monitored by Musk. An online poll conducted by @TroyTeslike, an active Tesla enthusiast on social media, revealed that half of the 8,000-plus respondents believed Tesla should begin advertising. This idea garnered more support than other growth strategies, such as further price reductions or adding technology to high-end Model S and Model X vehicles.
The push for change didn’t emerge out of thin air. At Tesla’s annual shareholder meeting in May, a shareholder raised the issue, challenging Musk. The shareholder, Kevin Paffrath, referred to Tesla’s practice of reducing car prices, stating that the money saved, such as $525 per car this year, could be used for advertising. He emphasized the appeal of safety features, including airbag deployment technology, which Tesla could highlight to consumers through advertising.
In response, Musk expressed willingness to explore the idea. He acknowledged that there are remarkable features and functionalities in Tesla that many people are unaware of. However, he also noted that most of those who follow Tesla and his accounts are already convinced of the brand’s merits.
Musk made a promise at the shareholder meeting, stating that he believed in considering suggestions and that Tesla would try a bit of advertising to gauge its impact. Shareholders cheered the announcement, and Musk was surprised by the enthusiastic response.
Despite the positive reception of the idea at the shareholder meeting, Tesla’s advertising efforts have been limited in the months that followed. According to Dan Ives, an analyst at Wedbush, Tesla has allocated only a minimal budget to online and social advertising. Instead, the company continues to heavily rely on price reductions to generate interest in its vehicles.
Musk’s Emphasis on Cost-Cutting
Musk has been a staunch advocate of cost-cutting as a primary strategy. He has emphasized Tesla’s goal of making electric transportation accessible to the mass market, often noting that many Model 3s are available in the U.S. for less than the average cost of a new passenger vehicle. Consequently, the average price of most Tesla models has decreased by about 20% since August 2022, as reported by Cox Automotive. These figures don’t account for the reinstatement of the $7,500 federal tax credit for Teslas under the 2022 Inflation Reduction Act.
However, the recent series of price reductions, announced over the past month, is taking a toll on Tesla’s finances. According to Black, these price cuts are costing Tesla approximately $2 billion annually. Moreover, Ives estimates that the price reductions over the past year have significantly impacted Tesla’s revenue.
In essence, Black’s argument suggests that Musk should reconsider the balance between price reductions and advertising spending. He believes that more focus on advertising is needed to communicate important features such as the affordability of electric vehicles and safety enhancements through over-the-air software updates. This is particularly pertinent given that Tesla’s stock, while up by about 140% this year, remains one-third below its 2021 peak and has underperformed the S&P 500 over the past year.
