Tesla Earnings Slide As Profit Margins Drop Below ‘Floor’; Musk Bets On Autonomous Driving

Tesla (TSLA) reported a big first-quarter earnings decline Wednesday night while revenue missed views. The global EV giant’s profit margins fell below 20% as the company has committed to a 2023 price-slashing strategy. TSLA stock stumbled late after falling during regular trading Wednesday.




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Tesla Earnings

Estimates: Analysts predicted Q1 earnings of 85 cents per share, a nearly 20% drop compared to last year. Wall Street forecasts revenue growing 26% to $23.73 billion.

Results: Tesla reported revenue increasing 24% to $23.33 billion with EPS of 85 cents, a 20% decline compared to 2022.

The EV company’s total gross profit came in at $4.5 billion, with Tesla’s profit gross margin at 19.3%, down from 23.8% in Q4 and 29.1% a year earlier. That is below the 20% gross margin “floor” Tesla had previously targeted. Wall Street had forecast margins around 21% in the first quarter.

The average Tesla vehicle selling price in Q1 was around $46,850, according to FactSet estimates. That’s down from $51,400 in the fourth quarter and $52,100 a year ago.

Free cash flow tumbled 80% vs. a year earlier to $441 million vs. expectations for more than $3 billion.

CEO Elon Musk told analysts Wednesday Tesla is “comfortable” with its 2023 production target of 1.8 million. However, Musk shied away from the 2 million production number he used at the end of Q4.

“These are volatile times,” Musk said. “From a production standpoint, if things go well, we’ve got a shot at 2 million vehicles here. But that is the upside case.”

Vehicle Price Trimming: Musk’s Take

Musk said that even with vehicle price cuts, “operating margin remains among the best in the industry.”

“We’ve taken a view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin,” Musk said Wednesday during the earnings call.

Tesla reported record Q1 deliveries earlier in the month, thanks to vehicle price cuts and new U.S. tax credits.

Tuesday night, Tesla trimmed prices in the U.S. for the second time this month. Tesla Model Y prices were cut by $3,000, starting at $46,990. Meanwhile, Tesla Model 3 prices were cut by $2,000, starting at $39,990.

That was Tesla’s sixth price reduction in 2023 and follows cuts in Europe, Singapore and Israel on Friday.

Musk said Wednesday “orders are in excess of production” after the latest round of vehicle price cuts.

Tesla Stock: Musk Banks On Autonomous Vehicles

“We expect our vehicles over time will be able to generate significant profit through autonomy. So we do believe we’re laying the groundwork here,” Musk added.

The Tesla CEO said the “value of a car that is autonomous is enormous,” stressing that improvements in Tesla’s Full Self Driving (FSD) beta are “really quite dramatic.”

“The trend is very clearly towards full autonomy, and I hesitate to say this, but I think we’ll do it this year,” Musk said, referring to self driving vehicles.

The Cybertruck Is Coming

Meanwhile, the Cybertruck remains “on track to begin production later this year,” but it’s unclear if the initial output will still begin this summer. The Cybertruck status is officially considered “tooling,” according to Tesla.

Musk told investors Wednesday Tesla is anticipating a Cybertruck delivery event “probably” in Q3.

Tesla Stock

TSLA fell 5.3% to around 171 late Wednesday. Tesla stock dropped 2% to 180.54 in Wednesday’s regular market trade.

The stock is facing resistance at the 21-day and 50-day lines after plunging in early April following earnings.

On a weekly chart, Tesla stock has formed a cup-with-handle base with a 207.89 buy point, according to MarketSmith analysis. But that’s slightly below the 200-day moving average, which could prove to be a resistance area.

Another possibility is if Tesla stock breaks above the 50-day line on earnings, offering an early entry with a little room to the 200-day.

Third Bridge analyst Orwa Mohamad wrote Wednesday Tesla is “over-reliant” on the Model 3 and Model Y for growth. Mohamad added investors want to see new product launches soon.

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

Tesla Stock: What Analysts Said Going Into Earnings

Wedbush analyst Daniel Ives, a longtime Tesla bull, wrote Sunday the main focus of the Street heading into Wednesday’s earnings is the margin structure of the business following vehicle price cuts. Ives said the “EV arms race is heating up globally.” Ives maintained an “outperform” rating and a 225 Tesla stock price target.

“We continue to strongly believe that aggressive price cuts by Tesla was a smart ‘rip the Band-Aid off moment’ for Musk & Co. to defend its EV turf.”

Ives also suggested the move “put an iron fence around” its customer base, but said it raised the question of when the price cuts will end and what Tesla’s margins will look like when they stop.

Meanwhile, Morgan Stanley analyst Adam Jonas wrote Monday Tesla “should be able to eke out a decent 1Q result.”

“It feels to us that Tesla earnings expectations are at a crossroads,” Jonas wrote. “Will investors see the industrial logic (masterstroke?) of leading the industry in price cuts rather than following it?”

Barclays on Monday maintained an “Overweight” rating on TSLA. However, the firm lowered its Tesla stock price target to 230, down from 275, citing margin pressures.

Analyst Dan Levy expected Tesla to sacrifice some margin to pursue sales volume through price cuts. However, Levy added TSLA remains a “winner in the EV world.”

What’s Up With The U.S. Tax Credits?

TSLA’s recent U.S. vehicle price cuts are ahead of the implementation of new battery and mineral component requirements to qualify for the full Inflation Reduction Act $7,500 tax credit for EVs.

The Biden administration announced on March 31 that vehicles eligible for the full $7,500 tax credit must have batteries with specific amounts of components from North America and critical minerals sourced in the U.S. or from certain countries.

Vehicles that meet one of the critical minerals or battery components requirements will be eligible for a $3,750 tax credit.

The battery criteria went into effect April 18. On Monday, The U.S. Treasury Department released its list of vehicles that qualify for the full $7,500 tax credit.

The Tesla Model 3 contains a battery from China. Tesla’s Model 3 page on its website has a banner informing EV shoppers they are eligible for a tax credit “up to $7,500.”

The Tesla¬† Model 3 Rear-Wheel Drive is eligible for a $3,750 tax credit. The Model 3 Performance trim qualifies for the full $7,500. All of Tesla’s Model Y vehicles also qualify for $7,500.

Jonas wrote Monday some investors may wonder how much of the first-quarter volume is a “pull forward” as consumers take advantage of the current tax credit.

“Our working assumption is that Tesla will continue its price cut campaign to ensure their vehicles come in cheaper than their competitors who do qualify for the IRA benefits,” the Morgan Stanley analyst wrote.

Tesla stock sits third in IBD’s Auto Manufacturers¬†industry group. TSLA has an 75 Composite Rating out of 99. Tesla stock has an 47 Relative Strength Rating. The EPS Rating is 93 out of 99.

Please follow Kit Norton on Twitter @KitNorton for more coverage.

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