Tesla Tempers Growth Expectations as Musk Sees Storm Ahead

Elon Musk is dialing back expectations for Tesla Inc. as years of rapid expansion collide with rising interest rates and a more cost-conscious consumer.

(Bloomberg) — Elon Musk is dialing back expectations for Tesla Inc. as years of rapid expansion collide with rising interest rates and a more cost-conscious consumer. 

After months of persistent price cuts, Tesla’s margins have fallen well below the floor once set by its recently departed chief financial officer. The company is “ruthlessly” cutting costs to keep up, according to vehicle engineering chief Lars Moravy. But an unpredictable economic environment has Musk feeling “paranoid,” and as a result, Tesla is slow-walking its newest factory in Mexico.

“Tesla will likely need to lower delivery expectations and face lower margins” next year, Toni Sacconaghi, an analyst at Bernstein with an “underperform” rating on the stock, wrote in a research note published Thursday. “Tesla is increasingly looking like a regular auto company.”

Tesla declined 5.8% to $228.73 as of 9:34 a.m. in New York. The stock is up about 86% this year.

Musk repeatedly lamented the toll that high interest rates and multiple wars are taking on consumer sentiment and purchasing power on a conference call late Wednesday after reporting earnings that missed estimates. He also described ramping up production of Tesla’s new Cybertruck as a challenge on par with the “production hell” the company endured in the past.

“Tesla is an incredibly capable ship,” the chief executive officer told analysts. “We’re not going to sink, but, even a great ship in a storm has challenges.”

Cybertruck Deliveries

The first Cybertrucks will be handed over to customers on Nov. 30, Tesla said, about two years behind schedule. Musk warned it may be another 18 months until the company reaches volume production and is generating significant cash flow from the pickup.

“We dug our own grave with Cybertruck,” Musk told analysts, referring to the level of complexity of the vehicle. “Special products that come along only once in a long while are just incredibly difficult to bring to market, to reach volume, to be prosperous.”

Tesla is even willing to to ditch stickers and QR codes on its car parts if it means saving a few pennies of cost, Musk said.

The company missed both earnings and sales expectations for the quarter, reporting that profit excluding some items fell to 66 cents a share, short of the 74 cents that Wall Street analysts estimated. While revenue rose to $23.4 billion, analysts were expecting $24.06 billion.

Tesla has repeatedly slashed the prices of its cars this year, with Musk saying he’s willing to sacrifice profits to increase sales. The markdowns are only going so far in lowering would-be customers’ monthly payments, Musk said, due to how much borrowing costs have risen.

Automotive gross margin excluding regulatory credits — a figure closely watched by investors — slumped to 16.3% in the quarter, the lowest in over four years. Analysts surveyed by Bloomberg were expecting 17.7%.

The Austin-based company delivered 435,059 vehicles globally in the period, its first quarterly decline in a year, after planned factory downtime slowed production. Tesla recently launched a refreshed Model 3 sedan in China and Europe.

Musk said Tesla is still planning a vehicle factory in Monterrey, Mexico, but isn’t ready to go “full tilt” on its construction because of the state of the global economy. The comments followed weeks of speculation about whether the plant, first announced in March, would be built at all.

“I don’t think Mexico is going to be a big part of their delivery growth any time in the next two or three years,” Seth Goldstein, an equities analyst at Morningstar, said in a phone interview after the hour-long earnings call.

Tesla did assure investors that it’s on track to make and deliver about 1.8 million vehicles this year. But the company will have to pick up the pace in the fourth quarter to meet that goal, and new CFO Vaibhav Taneja when asked about the outlook for next year.

In its quarterly slide deck, the automaker did drop some hints, cautioning that production will grow only gradually at plants in Texas and Germany, and ruling out a meaningful increase in output from its factory in China.

–With assistance from Anne Cronin and Esha Dey.

(Updates with analyst comment from third paragraph, adds opening shares.)

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