Tesla- The Goods and Bads

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Shares of the EV giant fell sharply during both normal trading hours and after-hours, given the mixed result from its latest earnings. Generally, the earnings were within expectation, but gross profit margins were uncomfortably low. That’s expected as Tesla had cut prices several times in numerous markets to gain market shares.

Let’s get into the details.

#1 Gross Profit Margins disappoint

Excluding regulatory credits, the gross margin for automotive came in below 16%, a drop from 21% in the previous quarter. This is the first time it has dropped below the 20% threshold since 2Q2020.

If we include the leases, things look slightly better though still weaker than most expected. Gross profit margins would have risen to around 19%, below the 21% estimates.

#2 Pricing strategy was aggressive

The attributing factor to the drastic decline is none other than a price cut. The average price per vehicle sold, calculated by adding the automotive sales and lease revenue divided by the deliveries figure, came in at $47,200. This is a mega fall from $54,400 seen in 1Q2022.

Then looking at the gross margin per vehicle sold with the lease included in the calculation, the figure becomes more gloomy. It came in at $8600, almost half of what was seen a year ago at $15,700.

General perception

It is clear that its latest earnings aren’t a strong showing by Tesla. Operating profit is sound at $2.7 billion, but expectations called for $3 billion. The operating profit margin stood at 11.4%, collapsing from 19.2% for the same quarter last. year.

Green shoots are still seen in latest report.

One possible reason that is keeping Tesla from absolute freefalling is Elon Musk talking about pricing during the conference call. He did not want to eliminate the EV competition, which is why Tesla is also opening up its supercharging network for other EVs.

Also, he appeared to be calm when looking at the current margin. Instead, his aim is to perhaps put as many Tesla vehicles on the road as possible. After all, Tesla earns fat profits from autonomous driving software. It was the same plan all along.

the CFO, Zachary also did not dial away from its 20% gross profit margin forecast and spoke about the various cost reduction plans that could be achieved with Tesla’s new factories.

Another comforting note is that Elon Musk maintains that the current order level still exceeds supply and that, based on a production goal, there is still a chance of hitting the 2 million vehicle mark this year. However, 1.8 million is the “comfortable” level.

The average cost to produce a Tesla car fell, which is a silver lining

With the general cost dropping, Tesla is producing its car on average at around $38,600, which is a commendable decline from its 2Q2022 peak of around $42,700. This is a melody for investors.

On the overall level, the automobile industry faced stiff competition, and Tesla was able to use its cost advantage in scaling up its market share while sacrificing short-term profit margin for a long-term era of prosperity, progress and leadership, possibly for the years to come.

We maintain our long-term market performance on Tesla, as we always have. We are biased no doubt.

What’s on our menu today?

At 8.30 pm, we will have our Initial Jobless Claims, which are expected to rise modestly from 239K to 240K.

Also, the Philadelphia Fed Manufacturing Index for April is likely to improve marginally from -23.2 to -19.2. This should bode well for the economic outlook.

Finally, at 10 pm, we welcome the Existing Home Sales for March, which is likely to see a drop from 4.58M to 4.5M.

FOMC Member Bowman is expected to speak again at 3 am.

It is 20 April, Thursday, 8.50 am in Singapore and 8.50 pm in New York. The market appeared to be relatively resilient despite a weaker showing in Netflix and the latest earnings result from Tesla. More is to be seen when the market opens at night.

It is likely to be a rainy day and we wish all friends a safe and enchanting day ahead.