Elon Musk's price cuts at Tesla are working – for now

• Tesla reported record-breaking Q1 deliveries of 422,875 vehicles.
• Analysts warn price cuts alone can't keep competition at bay.

Elon Musk's plan to boost demand for Tesla vehicles with price cuts appears to be working after the electric car company reported a 36% increase in sales in the first quarter.

This record-breaking first-quarter delivery report from comes after Tesla engaged in a series of price cuts and other purchase incentives for the last several months, a move that some investors worried would have too much adverse impact on the company's profit margins.

Other analysts and industry experts initially wondered if Musk was using price cuts to turn Tesla's demand problem into an advantage over his competitors.

After Tesla reported sales of 422,875 vehicles in the first three months of 2023 – most of those coming from the less-expensive Model 3 and Model Y – JP Morgan analyst Ryan Brinkman said the move by Musk appears to be paying off – so far.

"We note a +20% demand response seems needed to offset the impact of a -10% price reduction," Brinkman wrote in a note to clients Monday, noting that delivery estimates for the year are still down as Tesla faces industry-wide challenges like higher interest rates and unique issues like increased competition.

In total this year, Tesla is aiming to build 2 million vehicles, nearly doubling its 2022 production.

Tesla design refreshes remain a top priority for investors

With these impressive delivery numbers, Tesla is on its way to becoming the mass-producer of EVs Musk has promised the company will be. But analysts warn that price cuts alone cannot stave off competition forever.

Deutsche Bank analyst Emmanuel Rosner said expected design refreshes on the Model 3 and Model Y vehicles will be important for the company to remain competitive, especially in the ultra-important Chinese EV market.

"Longer term, we continue to believe that as Tesla executes on its cost and efficiency initiatives in the next gen platform, the company will deepen its competitive moat and grow its lead in the electrification space," Rosner wrote.

In mid-morning trading, Tesla's stock was down about 6.4% at $194.22 per share.

For many years, Tesla has decided against expensive redesigns and model-year changeovers in favor of over-the-air updates that continuously change and improve the Tesla driving experience. But as Teslas become more ubiquitous, some analysts have warned that Musk will need to start refreshing the looks of his electric cars.

Teslas are still piling up after deliveries increased

Tesla also reported Q1 production of 440,808 vehicles, leaving a considerable gap between production and deliveries despite the increase in sales in the quarter. This is a problem many EV startups who have eschewed the traditional dealer model have experienced.

For Tesla, which has now seen production out-pace deliveries for four quarters in a row, it's a sign to some analysts that the company still has a deeper demand problem to address.

"Continued excess production over deliveries will keep the debate going on price elasticity versus general demand weakness," Jefferies analyst Philippe Houchois said in a note.