By most measures, Gary Black qualifies as a big supporter of electric-vehicle giant Tesla. The Chicago fund manager has had Tesla as his No. 1 or No. 2 holding since he opened his fund in 2021, and often appears on social media (and sometimes CNBC) to talk about it, usually supportively. But there's one thing Black has had on his mind lately: That Tesla is wasting money on price cuts to keep growth rates high.
As Tesla's growth in unit sales of its cars and SUVs has lagged and the launch of its Cybertruck pickup has lingered just over the horizon, Black insists that Tesla, really Elon Musk, should abandon a long-standing opposition to spending on major media campaigns instead.
His once-lonely campaign has been picking up allies lately in a domain where Musk pays close attention — social media. An online poll run by @TroyTeslike, another active social-media Tesla fan, found half of the 8,000-plus respondents thought Tesla should start advertising, beating out growth strategies like more price cuts and adding technology to high-end Model S and Model X.Â
The investor pressure, or at least nudging, didn't come out of nowhere. Last May at Tesla's annual shareholder meeting, Musk looked surprised, if a little amused, when a shareholder challenged him on the issue about 70 minutes in, to the cheers of a crowd dominated by Tesla fanboys.
"525 bucks off of every car this year is half of Netflix's ad budget, and 1000 bucks is the entire Netflix ad budget and I see their ads everywhere. Why not advertise these things you told us about here?" said Kevin Paffrath, who runs The Meet Kevin Pricing Power ETF in southern California. He specifically referred to safety features including airbag deployment technology as Tesla advantages that might appeal to consumers through advertising.
Musk expressed openness to the idea.
"There are amazing features and functionality about Teslas that people just don't know about, although obviously a lot of people who follow the Tesla account and my account to some degree, it is preaching to the choir and the choir is already convinced," Musk said.
Then Musk made a promise. "I think what you are saying does have some merit and I believe in taking suggestions and we'll try a little advertising and see how it goes," he said.
The shareholders erupted in cheers, to which Musk responded, "I wasn't expecting that level of enthusiasm."
If shareholders expected a major advertising push, they'd be disappointed today. In the months since, according to Wedbush analyst Dan Ives, Tesla has spent very minor amounts on online and social advertising. At the same time, the major price cuts continue as Musk's primary strategy to drum up more interest in Teslas.
Musk has been a firm proponent of cost-cutting first. As he said at this year's annual meeting, Tesla's goals include bringing electric transportation to mass-market consumers, and as he said, many Model 3s can be had in the U.S. market for less than the average cost of a new passenger vehicle.Â
Indeed, the average price of most Teslas has fallen about 20% since August 2022, according to Cox Automotive. The figures don't include the restoration of the $7,500 federal tax credit for Teslas under the 2022 Inflation Reduction Act.
But the most recent round of price cuts, announced over the past month, is costing Tesla an annual $2 billion a year, Black said. Overall, the price cuts over the past year have shaved revenue by much more, Ives estimated.
Black's premise, in effect, is that Musk should reconsider how much Tesla relies on price cuts versus spending money on advertising to get the word out about features like the falling cost of EVs and safety features like over-the-air software updates. It becomes especially pressing considering that Tesla stock, while up about 140% this year, is still one-third below its 2021 peak and has trailed the S&P 500 over the last year.
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"I don't think that you get that much demand elasticity by cutting a Model Y to $48,000 from $55,000,'' Black said. "Instead of a $2,000 price cut, let's do $1,800 and try advertising more."Â
CNBC reached out to Tesla multiple times. The company did not respond.
In effect, Black argues that Tesla price cuts are a de facto marketing expense, saying Tesla's share losses among EVs by Tesla this year suggest price cuts alone aren't working.
Indeed, Tesla's U.S. market share among EVs has been slipping even as it cuts prices. Third-quarter deliveries were 435,059 units, up sharply from 343,830Â a year earlier but below second-quarter unit sales of 466,140 and first-quarter sales of about 423,000. In a press release, Tesla blamed the third-quarter number, which missed analyst projections, on "planned downtime for factory upgrades."Â
The lower prices are also showing up in Tesla's gross margins, which dropped to 18% of sales in the second quarter from 25% in the second quarter of 2022, Ives said. That implies a $1.5 billion drop in potential gross profit, unless some of it is made up in higher sales volume, he said.Â
What a Tesla ad campaign might look like
It's possible to guess at what an effective Tesla ad campaign might do, said Allen Weiss, CEO of MarketingProfs, a marketing research and training firm, who pointed to many features beyond just safety that consumers do care about.Â
"I would start by identifying what benefits customers are looking for, which are likely some [about performance] but others are [about] luxury and even others are symbolic, [being] a person who helps save the planet,'' he said. "I would find out what these benefits are, target a segment of these buyers and put a great theme around these benefits. That way, you can have fun ideas but are connecting with the buyers on what they really care about."
Tesla's challenge is that, as it grows, it's competing more directly with companies that are experienced marketers, Weiss said. Ford has already spent conspicuously to promote its F-150 Lightning pickup, and General Motors has run Super Bowl ads for the last three years. Weiss said Swedish EV maker Polestar also advertises, spending an estimated $20 million this year. Polestar and BMW have both touted EVs on the Super Bowl telecast, the most expensive U.S. TV buy, and industry data firm iSpot estimates that about a quarter of 2022 car ad spending was for EVs, a move Ives called a "tidal wave" that he predicts will grow.
"Other carmakers are used to focusing more on customer benefits, while Tesla is not," Weiss said. "Go to Ford's website and click on electric and you will immediately see words like head-turning design, impressive performance and thrill. Go to BMW's electric vehicles page and you see 'cutting edge performance and luxury.' Go to Tesla's site and you see, well, price."
Musk himself conceded at the annual meeting that he is often confronted by people who tell him that EVs are too expensive.Â
"I've talked to lots of people who still think Teslas are, like, super-expensive," Musk said. "I'm like, no, the [average selling price] of a Tesla is lower than the average selling price in the U.S."
Tesla doesn't need to spend as much as Ford or GM do on advertising, Ives said, arguing that a focused campaign could zero in on specific Tesla or EV advantages.Â
"There are differentiations to Tesla that people don't know about,'' he said. Advertising can also be deployed to sustain Tesla's luxury brand image even as the average cost of its cars falls, he said. "You start to change perceptions."
The "name of the game" at Tesla as it reaches its full scale is volume and operating margins, Ives said. Black argues that it's worth finding out, soon, whether advertising more will help. Even Musk may be convincible, and the irony of his longstanding reluctance to advertise wasn't lost on him at the annual meeting:
"I think it's ironic that Twitter [X] is highly dependent on advertising and here I am 'never use advertising' and now have a company that's highly dependent on it. I guess I should say advertising is awesome and everyone should do it."
Correction: An image in this story shows a Tesla Model X inside a showroom. An earlier version of this story included a Getty Images photo caption that misidentified the Tesla model.
