Elon Musk signaled Tesla will continue to cut prices to stoke demand for its electric vehicles, even at the expense of its industry-leading profit margins.
Musk argued he has good reasons for doing so, saying Wednesday that Tesla can financially withstand price cuts, giving it the upper hand against rivals. Investors weren’t so sure, sending the company’s stock lower in aftermarket trading.
“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 on a call with analysts.
Tesla Model 3. Image: Noriko Hayashi/Bloomberg
The price drops have been dramatic. The base price of the Model 3 has now dipped below $40 000 in the US for the first time in years, a roughly $7 000 cut from the start of the year.
That has eaten into the company’s income. Tesla’s operating margin was 11.4% in the first quarter, down from 16% the previous period and 19.2% a year ago. The Austin, Texas-based company declined to provide its automotive gross margin, a closely watched metric, for the first time in years, only saying it fell from the fourth quarter.
Automotive gross margin without taking credits into account came to 19%, below a consensus of 21.8%, Colin Langan, an analyst at Wells Fargo, wrote in a research note Wednesday evening.
Chief Financial Officer Zachary Kirkhorn said on the conference call that margin shrinkage hasn’t crimped Tesla’s capital expenditure programs to ramp-up output over the next couple of years.
“We have a lot of space before that becomes something we have to revisit,” he said.
Profit advantage
Despite the first-quarter slump, Tesla’s margins are still higher than other automakers. In 2022, General Motors Co. had an operating margin of 6.6% while Ford Motor Co.’s was just 4%. Tesla executives said the company still boasts some of the best operating margins in the business.
Tesla’s revenue rose 24% to $23.33 billion in the first quarter, nearly in line with Bloomberg estimates of $23.35 billion. It reported regulatory credits of $521 million. But profit excluding some items fell to 85 cents a share, slightly below the 86-cent average of estimates compiled by Bloomberg, and free cash flow slumped to a two-year low of $441 million.
The company’s shares slid more than 6% in late trading in New York after Musk laid out his thinking. The stock was up 47% so far this year through Wednesday’s close.
“Tesla is going through a rough patch,” said Gene Munster, managing partner at Deepwater Asset Management. “They are holding things together, but investors want to see some of these trends start to improve.”
The EV maker said output this year will meet previous guidance for compound average annual growth of 50% over multiple years, and said it’s on track to deliver about 1.8 million vehicles this year. It produced 440 808 cars and delivered 422 875 vehicles in the quarter, resulting in excess inventory of about 18 000.
Musk sought to ease concerns about that overhang, telling analysts on the call that orders are now outpacing production.
Cybertruck on track
The Tesla Cybertruck. Image: Nic Coury/Bloomberg
Production of Tesla’s long-awaited Cybertruck electric pickup is on track to start later this year at its plant in Texas, with a “delivery event” as early as the third quarter. The company also is making progress on its next-generation vehicle platform, according to a shareholder letter. Those future product models will be unveiled at a “later date,” the company’s design chief, Franz von Holzhausen, said at an event last month.
Tesla’s unique position among carmakers has drawn comparisons to the early days of Ford. That company introduced the Model T in the early 1900s and put other carmakers out of business by using an assembly line to churn out much cheaper vehicles. Musk argued it’s not quite the same — he’s not as focused on putting competitors out of business as he is on giving more customers access to Tesla cars amid rising interest rates and high inflation.
“They’re going to use the room in their margin to create more demand,” said Ben Kallo, an analyst at Robert W. Baird, in a Bloomberg Television interview. “They can cut prices and box out other people.”
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