Shares of Tesla Inc slumped the most in more than three months after Elon Musk said his company would continue to cut prices to boost demand, even after price cuts earlier this year took a big toll on profitability. Operating margin fell to 11.4% in the first quarter, the lowest level in nearly two years, after Tesla cut prices on electric vehicles in January and March. Musk has made multiple rounds of price cuts this month and has said he is happy to make less money on each car sold.
“In our view, driving higher volumes and a larger fleet is the right thing to do, rather than driving lower volumes and improving margins,” the chief executive told analysts late Wednesday. He and the chief financial officer Chief executive Zachary Kirkhorn walked back an automotive profit margin forecast for this year and repeatedly warned that the state of the economy was uncertain.
Shares of Tesla fell 9.75 percent in New York on Thursday, the biggest drop since Jan. 3, to $162.99. The stock was up 47% this year through Wednesday.
Tesla’s discount is remarkable in both size and time span — it cut the starting price of the Model Y by 29% in just over three months. Musk’s actions have sparked debate over whether he is on the upper hand or on the weak side. While Tesla remains the best-selling electric vehicle and is in a rare vantage point to mass-produce EVs, its The rate of growth has slowed considerably.
“Tesla is going through a tough time,” said Gene Munster, managing partner at Deepwater Asset Management. “They’re coming together, but investors want to see some of these trends start to improve.”
Tesla’s gross margin on vehicles, excluding sales on regulatory credit, fell to 19 percent in the quarter, down from the 20 percent threshold Kirkhorn said three months ago that the company expects to stay below the 20 percent threshold this year.
“It’s hard to say what the profit margin is,” Musk said when asked what level of profitability Tesla was comfortable with.
Kirkhorn added that lower margins would only cause concern if it dents Tesla’s ability to reinvest in future products.
“We have a lot of room before this becomes something we have to revisit,” he said.
Tesla still leads other automakers in terms of return on sales: GM’s operating margin is 6.6% in 2022, compared with Ford’s 4%.
First-quarter revenue rose 24% to $23.33 billion, in line with analysts’ average estimate of $23.35 billion. Profit excluding certain items fell to 85 cents a share, slightly below consensus estimates of 86 cents, and free cash flow fell to a two-year low of $441 million.
Tesla reiterated that its production this year will meet its previous forecast of a multi-year compound growth rate of 50%, and said it is on track to produce at least 1.8 million vehicles this year. It produced 440,808 vehicles and delivered 422,875 during the quarter, leading to an increase in days of inventory to early 2020 levels.
While Musk told analysts that orders exceeded production, he made a similar statement during Tesla’s last earnings call.
Production of Tesla’s long-awaited Cybertruck pickup is expected to begin later this year at its Texas factory, with deliveries likely to take place in the third quarter. The company is also making progress on its next-generation vehicle platform, which is expected to cost half as much to produce as current models.
Tesla’s unique position among electric automakers is reminiscent of Ford in its early days. Its innovation in the early 1900s—the moving assembly line—put other automakers out of business by driving costs down to levels no other company could match.
Musk said on Wednesday that Tesla does not intend to bankrupt rivals, but instead wants to make its cars more accessible amid rising interest rates and stubborn inflation.
“They’re going to use their margins to create more demand,” Robert W. Baird analyst Ben Kallo said in an interview with Bloomberg Television. Others were turned away.”
First published date: April 21, 2023 at 09:40 AM CST