Tesla Earnings to Reveal Profit Impact Wrought by Price Cuts

Investors have pushed Tesla Inc. stock higher for months despite deteriorating fundamentals. The electric-vehicle maker’s results later Wednesday will test that strategy.

(Bloomberg) — Investors have pushed Tesla Inc. stock higher for months despite deteriorating fundamentals. The electric-vehicle maker’s results later Wednesday will test that strategy. 

Tesla’s third-quarter profit estimates have plunged by nearly 50% this year amid aggressive price cuts aimed at stoking demand for its cars. Yet the stock has doubled over the same period, adding about $400 billion in market value.

The conflicting signals are the result of bets that the automaker led by Elon Musk will maintain its dominance in the fast-expanding EV market and emerge as a leader of self-driving cars and artificial intelligence. But Tesla’s rapidly eroding margins are raising doubts about the viability of maintaining sales growth by waging a price war.

“The main debate on Tesla concerns whether the stock will re-rate lower if the rate of deliveries slow and new models come at lower profitability,” RBC Capital Markets analyst Tom Narayan wrote in a note on Monday.

When Tesla reports after markets close, a closely watched number will be automotive gross margin. This measure of profitability in the core car-selling business, is expected to drop to about 19% from 28% in the same period a year ago, according to the average of analyst estimates compiled by Bloomberg. Tesla shares are down more than 4% on Wednesday amid a broader electric-vehicle maker selloff.

Gene Munster, managing director of Deepwater Asset Management, believes third-quarter automotive gross margins excluding regulatory credits — a key metric that Tesla typically does not break out — will likely disappoint, but he expects it to rebound in the final quarter of the year.

“Margins are particularly important to the Tesla investment case given they’re at the front line of the investment debate: Is Tesla a car company or a tech company?”

Tesla’s market valuation, which dwarfs that of even the biggest global carmakers, implies investors see it as more than just a carmaker. For such bullish investors with faith in Tesla’s potential, the near-term margin declines are seen as just a temporary blip.

Musk himself has said that it made sense for the company to “sacrifice margins in favor of making more vehicles,” in a bet that the value of the cars themselves can dramatically increase once they have full autonomous driving capability — an outcome that experts broadly agree can be a decade or more away.

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The chief executive officer said in July that Tesla will have to keep lowering prices as interest rates continued to rise. Since then, the company has cut prices multiple times. The recent declines in the cost of battery raw materials like lithium can help offset some of the hit to profitability, but analysts say it may not be enough.

Despite those efforts to stoke demand, third-quarter deliveries reported earlier this month still missed analysts’ estimates and was the first quarterly decline in more than a year. That to some suggested the price cuts may be losing the power to boost demand as much as they once did. Profit meanwhile is estimated to be 74 cents a share, down from the $1.38 expected at Dec. 31, and about 30% lower than the previous-year quarter.

But more importantly for bulls, revenue in 2024 is estimated to jump more than 25%, along with a 37% increase in earnings, reflecting an expectation that the company will maintain its lead in the industry as consumers adopt EVs at a quicker pace. Investors will also watch for any update on when deliveries of the much-awaited Cybertruck will begin.

Tesla’s “revenue growth continues in spite of falling prices,” said Brian Mulberry, a client portfolio manager at Zacks Investment Management, which owns the company’s shares and manages $15 billion in assets. On top of that, “Tesla already has the best margins per unit sold in the automotive industry; bottom line, we do not see a material weakness developing even if margins are moving slightly lower.”

Tech Chart of the Day

ASML Holding NV shares fell 2.4% on Wednesday after the Dutch chipmaking equipment giant reported revenue that missed estimates for the first time in seven quarters. Bookings fell to the lowest level since 2020, as major chipmakers paused ordering cutting-edge semiconductor gear. Chinese clients — which contributed to almost half of ASML’s sales last quarter — remained a bright spot in demand.

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Earnings Due Wednesday

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–With assistance from Dana Hull, Subrat Patnaik, Henry Ren and Jeran Wittenstein.

(Adds shares in fifth paragraph.)

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