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

The Elon Musk-led EV maker has slashed prices several times since last year, sacrificing profit margins to boost sales.

Tesla missed market estimates for total gross margin in the first quarter on Wednesday, throttled by a series of aggressive price cuts designed to boost demand in a slumping economy and fend off increasing competition.

Elon Musk-led Tesla reported an overall gross profit margin of 19.3 percent, compared to 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 has more capital left over, which it can then use to pay other expenses or pay off its debts.

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

The electric vehicle maker has cut prices several times since late last year in the United States, China and other markets as Musk said Tesla could sacrifice its industry-leading margins to drive volume growth during a recession.

However, analysts say Tesla may need to lower prices further, under pressure from an ongoing price war, especially in China, and to support demand for its aging model range even as the new plants in Berlin and Texas are producing cars.

In the US, where federal subsidies have only modestly boosted sales recently, Tesla has cut car prices six times so far this year, hurting its gross margin in the auto sector. It has also expanded price cuts in Singapore, Israel and Europe.

Chief financial officer Zachary Kirkhorn promised in January that Tesla would not go below 20 percent margins and an average retail price of $47,000 across all models.

Tesla reiterated on Wednesday that it expects to ship about 1.8 million vehicles this year.

The EV maker has previously said logistical 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 $23.33 billion, compared to a consensus estimate of $23.21 billion, according to 22 analysts surveyed by Refinitiv.

The company reported net income of $2.5 billion, down from $3.32 billion a year earlier.

“We also suspect that Tesla’s decision to consistently lower prices will create a headache for the competition,” Canaccord Genuity analyst George Gianarikas said in a brokerage note ahead of earnings.

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

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

Shares of these companies fell slightly in aftermarket trading on Wednesday.