Tesla Price Cuts Squeeze Its Industry-Leading Profits

Tesla Inc. fell in late trading after saying profitability shrank in the second quarter and the hits are likely to keep coming.

(Bloomberg) — Tesla Inc. fell in late trading after saying profitability shrank in the second quarter and the hits are likely to keep coming.

Elon Musk said the company will probably keep slashing prices of electric vehicles if interest rates continue to rise. Months of markdowns have already taken a toll on Tesla’s gross margin, which fell to 18.2% in the second quarter, down from 25% a year ago.

Tesla is also pouring money into other investments, like its new Cybertrucks and Dojo — an in-house supercomputer it will spend at least $1 billion on by the end of 2024. And while Tesla is on track to produce a record 1.8 million vehicles in 2023, output will slow during factory upgrades this quarter, Musk said.

The CEO characterized the smaller profits as speed bumps in a broader growth story, and claimed Tesla could one day be 10 times its current size. Investors still reacted negatively. The stock fell 4% at 7:45 p.m. in New York after more than doubling so far this year.

“It does make sense to sacrifice margins in favor of making more vehicles because we think in the not too distant future they will have a dramatic valuation increase,” Musk said.

Read More: Musk Says Tesla to Spend Over $1 Billion on Dojo Supercomputer

Tesla’s strategy of cutting prices to increase sales volume — a reaction to smaller household budgets and new competitors — has been working. The company beat both earnings and revenue expectations in the second quarter and had already announced record vehicle deliveries for the period.

“Given the stock’s meteoric run-up so far in ‘23, investor expectations were clearly high heading into the release,” Garrett Nelson of CFRA Research said in a note to clients.

The carmaker’s profit, excluding some items, came to 91 cents a share, more than the 81 cents analysts estimated. Revenue rose 47% to $24.9 billion, Tesla said. Analysts had expected the company to generate $24.5 billion in sales.

The company didn’t break out its automotive margin, a closely watched gauge of Tesla’s profitability which was more than 30% at the start of last year. Barclays analyst Dan Levy calculated auto margin to be 18.1% for the quarter, excluding the impact of regulatory credits.

In January, Tesla Chief Financial Officer Zachary Kirkhorn said he was targeting a 20% auto margin for the year, excluding regulatory credits. That’s been tough to maintain amid a broader slowdown in EV buying and ballooning inventories, and Kirkhorn walked back the forecast in April.

Inventory Buildup

Adding to the Austin-based carmaker’s challenges is its ever-larger inventory of cars. The company said it now has 16 days worth of inventory globally, up from 15 days last quarter and four days a year ago. 

That’s after months of markdowns, some as large as 30% on best-selling Tesla models, and perks the carmaker has offered, including free charging. 

The company said it’s still on pace to grow production about 50% in 2023. Musk didn’t provide any finer details on the third-quarter production slowdown, calling it a result of “summer shutdowns.” He also said earlier this year that the company had “a shot” at making 2 million cars.

Analysts have said new models, like the Cybertruck, could help Tesla maintain its extraordinary sales-growth rate. However, the long-awaited truck likely won’t be available in large volumes until next year. The first Cybertruck rolled off the line in Tesla’s Austin factory just recently, the company said over the weekend.

Tesla clarified the Cybertrucks being built now, already two years late, are actually “release candidates” and not for sale. It didn’t offer any information about pricing, though said the first Cybertrucks will probably hit the market later this year.

Musk also touted the company’s work on its driver-assistance software, which Tesla said it wants to license to other automakers. However, most investors expect it’ll be years before cars will be able to safely run without a human at the wheel.

(Updates with conference call details from second paragraph. An earlier version of this story corrected the automotive gross margin.)

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