Tesla’s profit margins drop on aggressive discounts, shares fall

Tesla missed market estimates for first-quarter total gross 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 reported a total gross profit margin of 19.3 percent, compared with expectations of 22.4 percent, according to 14 analysts polled by Refinitiv. This was the lowest since the fourth quarter of 2020.

A higher gross margin means a company retains more capital, which it can then use to pay for other costs or service its debt.

Shares of the Austin, Texas-based automaker fell by nearly 4 percent in trading after the bell.

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.

Analysts say, however, that Tesla may need to cut prices further, pressured by an ongoing price war, especially in China and to prop up demand for its ageing lineup of models even as its new factories in Berlin and Texas churn out cars.

In the US, 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.

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

Tesla on Wednesday reiterated that it expects to achieve deliveries of approximately 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 $23.33bn, compared with a consensus estimate of $23.21bn, according to 22 analysts polled by Refinitiv.

The company reported a net profit of $2.5bn, down from $3.32bn a year earlier.

“We also suspect Tesla’s decision to consistently cut prices will prove a headache to competitors,” Canaccord Genuity analyst George Gianarikas said in a broker note ahead of earnings.

“While Tesla’s industry-leading margins will likely be sacrificed in the near term (as articulated on the company’s 4Q22 earnings call), many EV competitors are struggling to turn a profit.”

Tesla’s sixth price cut on Tuesday, ahead of results, knocked down its shares and those of its EV rivals Lucid and Rivian.

In post-market trading on Wednesday, shares in these companies fell slightly.