Tesla’s margins drop on aggressive discounting, shares fall

Tesla’s margins drop on aggressive discounting, shares fall

FILE PHOTO: FILE PHOTO: Visitors check a Tesla Model 3 car next to a Model Y displayed at a showroom of the U.S. electric vehicle (EV) maker in Beijing, China February 4, 2023. REUTERS/Florence Lo


By Akash Sriram and Hyunjoo Jin

(Reuters) -Tesla Inc missed market estimates for first-quarter margin on Wednesday, throttled by a series of aggressive price cuts meant to spur demand in a sagging economy and fend off rising competition.

Elon Musk-led Tesla (NASDAQ:TSLA) reported total gross margin of 19.3%, compared with expectations of 22.4%, according to 14 analysts polled by Refinitiv. This was the lowest since the fourth quarter of 2020.

For the first quarter, Tesla’s automotive gross margins, a closely watched figure by analysts and investors, dropped. Analysts had expected Tesla to report auto gross margin of 23.2% for the quarter, according to 17 analysts polled by Visible Alpha, down from a record 32.9% a year earlier and the lowest since the fourth quarter of 2019.

Shares of the Austin, Texas-based automaker were down 3.2% in after-hours trading.

“We expect that our product pricing will continue to evolve, upwards or downwards, depending on a number of factors,” the company said in a statement.

Finance chief Zachary Kirkhorn promised in January that Tesla would not go below automotive gross margins of 20% and an average selling price of $47,000 across models.

The electric-vehicle maker has slashed prices several times in the United States, China and other markets since late last year, as Musk said Tesla could sacrifice its industry-leading margins to drive volume growth during a recession.

In the United States, where federal subsidies have recently boosted sales only modestly, Tesla has cut car prices six times so far this year, which has dragged its automotive gross margin. It has also expanded price cuts in Singapore, Israel and Europe.

“Our experts say Tesla is over-reliant on its Model 3 and Model Y for growth, adding that investors are keen to see new product launches soon,” said Orwa Mohamad, analyst at Third Bridge. “Tesla risks losing market share to other brands with more innovative line-ups in the USD 40,000-60,000 price segment. In particular, they need a full-size SUV to replace the Model X and a smaller, cheaper Model 3 to drive volume.”

“Tesla’s margins will continuously be put under pressure going forward due to price cuts and increased competition,” he added. “However, this should be mitigated by their investment in battery factories and the gradual normalization of raw material and logistics costs.”

Tesla said in a statement: “We continue to believe that our operating margin will remain the highest among volume OEMs.”

Cybertruck remains on track to begin production later this year at Gigafactory Texas, the EV maker said. In January, Musk said Tesla expects to start production of Cybertruck this summer, but that volume production will not occur until next year.

Tesla on Wednesday reiterated that it expects to achieve deliveries of around 1.8 million vehicles this year.

The EV maker has previously said that logistics issues have caused it to deliver far fewer cars than it makes. In the first quarter, it delivered about 18,000 fewer cars than it made.

The company reported first-quarter revenue of $23.33 billion, compared with consensus estimate of $23.21 billion, according to 22 analysts polled by Refinitiv.

The company reported net profit of $2.5 billion, down from $3.32 billion a year earlier. Excluding items, Tesla reported a profit of 85 cents, in line with estimates.

Tesla said its profitability was also weighed down by higher raw-material, commodity, logistics and warranty costs as well as cost of production ramp of its 4680 battery cells, while it faced margin headwinds from the underutilization of its new factories.

Deliveries of higher-priced Model S and Model X vehicles slumped from the previous quarter, it said.


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