Tesla Sinks as Investors Brace for New Hits to Profitability

Tesla Inc. shares fell in late trading after the carmaker warned of more hits to its already-shrinking profit margins.

(Bloomberg) — Tesla Inc. shares fell in late trading after the carmaker warned of more hits to its already-shrinking profit margins.

Elon Musk said the company probably will keep lowering the prices of its 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, a three-year low.

Tesla is also pouring money into other investments, including its newest model, the Cybertruck, and Dojo, an in-house supercomputer that Musk said the company will spend at least $1 billion on by the end of next year. And while Tesla remains on track to produce around 1.8 million vehicles in 2023, output will dip this quarter due to factory upgrades.

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, with the stock falling 4% at 7:45 p.m. Wednesday 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 stretched 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 that analysts estimated. Revenue rose 47% to $24.9 billion, better than consensus expectations for $24.5 billion.

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 the margin to be 18.1% for the quarter, excluding 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 supply globally, up from 15 days last quarter and four days a year ago.

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

Musk didn’t provide any finer details on the third-quarter production slowdown, calling it a result of “summer shutdowns.” He said earlier this year that the company had “a shot” at making 2 million cars.

While analysts have said new models like the Cybertruck could help Tesla maintain its sales-growth rate, the long-awaited truck 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 — roughly two years late — are actually “release candidates” and not for sale. The company didn’t offer any updated information about pricing and said it will start deliveries later this year.

Musk also touted Tesla’s driver-assistance software, which the company may make available to other automakers. The CEO said Tesla is in early discussions about potentially licensing its system to a major manufacturer he didn’t name.

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

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