Price wars have consequences, also for Tesla, the most valuable car company in the world.
Tesla’s (ticker: TSLA) first-quarter results, reported Wednesday night, met expectations, but first-quarter auto gross margins were shocking — appallingly poor. No matter how investors slice and dice the numbers, the results will leave them with questions about demand and Tesla’s pricing strategy.
Auto gross margins, excluding regulatory credit, were below 16%, compared to about 24% in the fourth quarter of 2022. Wall Street was targeting about 21%. It’s a miss of 5 percentage points. Including the vehicle leasing business, the auto business generated gross profit margins of about 19%, which is still below expectations of 21% and below the 20% forecast by investors. Some analysts model margins excluding loans and leases, making it difficult to pinpoint exactly how big the miss was.
Pricing is the main reason for the margin decline. An approximation of the average price per vehicle sold, calculated by dividing automobile sales by deliveries, was about $44,600, down nearly $10,000 from about $54,400 in the first quarter of 2022 . And gross margin per vehicle sold was about $6,800. Including leasing, it cost about $8,600. A year ago, that number was around $15,700.
It’s not a strong feat for the EV maker. Investing.com analyst Jesse Cohen called the results unconvincing. “After the first quarter results, we are less confident in TSLA’s ability to accelerate revenue growth and increase operating margin,” he said.
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Tesla shares are down 3.5% in after-hours trading on Wednesday, after falling 2% during the regular session. The Nasdaq Composite and S&P 500 closed roughly flat.
The rest of the quarter looked good. Tesla reported earnings of 85 cents a share, matching expectations on sales of $23.33 billion, just a touch below guidance of $23.67 billion.
Tesla’s so-called other business was doing well, generating a record gross profit of $1.1 billion. Without leasing from others, the company generated a record gross profit of $303 million. Tesla deployed 3.9 gigawatt-hours of battery storage in the quarter, up about 300% year over year.
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Reported total operating income was $2.7 billion, below Wall Street’s expectations of $3 billion. Operating profit margins were 11.4% compared to 19.2% in the year-ago quarter.
Operating profit margins of 11% make Tesla look like a traditional automaker. Toyota Motor(TM) operating profit margin for the fourth quarter was nearly 10%.
“In the current macroeconomic environment, we see this year as a unique opportunity for Tesla,” the quarterly report said. “As many automakers overcome challenges with the unit economy of their EV programs, we want to expand our position as a cost leader.”
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Tesla is trying to step on the competition’s throats and is willing to take advantage of vehicle prices to do so. The problem for Tesla is that General Motors (GM) and Ford Motor (F) are still making big bucks in their traditional auto businesses. Losses in these companies’ EV businesses are yet to materialize, meaning Tesla may be leveraging its cost position early.
More on Tesla’s pricing strategy will almost certainly come on Wednesday night’s earnings call.
CFO Zachary Kirkhorn said on the company’s fourth-quarter earnings call in January that Tesla could achieve a 20% full-year gross profit margin in its auto business. Investors will want to know if that’s still the goal. His goal was probably the leasing business.
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Investors will also want to know if demand remains strong. Tesla’s press release also included a statement that it “stays on track with our growth investments.” That could be an endorsement of 1.8 million vehicle deliveries expected in 2023, but investors will have to wait and see what comes out of the call.
One bright spot for investors is that costs are falling. The average cost to produce one car was about $37,800, down from the peak of about $42,700 in Q2 2022. The type of vehicle ordered affects both the price and the cost calculation, so Investors should only use the cost calculation as a rough guide.
Another bright spot is the non-automotive business. Excluding leasing gross margins were approximately 8%, up approximately 10 percentage points year-over-year.
The cops will take comfort in that. But right now, Tesla is still primarily a car company. More than 90% of gross profit generated comes from car sales and car leasing.
Write to Al Root at [email protected] and Callum Keown at [email protected]