Tesla (TSLA) shares slumped lower Thursday after CEO Elon Musk warned investors that the clean-energy carmaker would likely focus on growing sales volumes and extending its lead in key markets over improving profitability.
Musk's comments followed a mixed first quarter earnings report that showed the weakest profit margins in more than two years linked in part to a series of price cuts put in place over the course of the year. Tesla posted adjusted earnings of 85 cents per share, down 20.5% from the same period last year and essentially matching the Street consensus forecast, on revenues of $23.33 billion.
Adjusted automotive margins were 18.3%, Tesla said, a big decline from the 26.8% figure from last year's first quarter and the 22.2% tally recorded over the final three months of 2022 following a series of price cuts in its biggest global markets.
CFO Zachary Kirkhorn said the largest impacts came from "additional action taken in the second half of the quarter to improve vehicle pricing, one-time items most notably warranty adjustments on older S and X vehicles as well as increased deferred revenue for certain autopilot features as we transition technologies."
Musk justified the narrowing margins, and the group's focus on volumes over profits, as necessary steps in its plan to generate longer-term revenues, and recurring earnings, from automated vehicle sales over the coming years.
"We’re taking a view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin," Musk told investors on a conference call late Wednesday. "However we expect our vehicles over time will be able to generate significant profit through autonomy."
"So we do believe we’re laying the groundwork here and then it’s better to ship a large number of cars at a lower margin and subsequently harvest that margin in the future as we perfect autonomy," he added. "This is an extremely important point."
Tesla shares were marked 9.3% lower in early afternoon trading Thursday to change hands at $163.70 each, a move that would still leave the stock with a year-to-date gain of around 32.9%.
Tesla posted a record first quarter delivery total of 422,875 new vehicles, a 36.4% increase from the same period last year, but that tally missed Street forecasts as production outpaced demand. Production rose 44.5% to 440,808 vehicles as supply chain disruptions and Covid-related closures at its Shanghai factory faded.
The pace is firmly shy of the rate needed to meet Tesla's own target of 1.8 million deliveries over the whole of 2023, and CEO Elon Musk's suggestion that, "if it's a smooth year ... without some big supply chain interruption or massive problem" deliveries could reach 2 million.
Musk declined to confirm that forecast during last night's conference call, but Tesla nonetheless stuck to its official estimate of 1.8 million deliveries.
"These are volatile times. From a production standpoint, if things go well, we’ve got a shot at 2 million vehicles this year," Musk said. "But that’s an upside case. And we feel comfortable with 1.8 million. And we’ll have to see how this year unfolds."
The more immediate concern, however, is the hit Tesla is taking on profits after it lowered the price of its base Model Y SUV by around $3,000, extending this year's price reduction to around 29%, and cut the cost of its Model 3 sedan by $2,000, according to data taken from its U.S. website late Tuesday.
The group has also reduced the starting price of its Model 3 sedan by around 13.5% in China, according to data from its website. It lowered the price of its Model Y by around 10% to 259,900 yuan, the equivalent of around $37,660, as it dealt with increasing competition from China-based rivals in the world's biggest car market.
The near-term margin pain for long-term demand/volume gain is a strategy the Street is mostly on board with, however dipping below the magical 20% threshold is a concern," said Wedbush analyst Dan Ives, who lowered his price target by $10, to $215 per share, following last night's first quarter update.
"The FSD driving the margin story going forward is not a narrative many are huge fans of and we believe Tesla now walks a tight rope between margin pressure vs. driving stronger Model Y/3 demand globally," he added. "We remain very bullish on the Tesla story, however, this margin compression and price cut narrative must be carefully managed over the coming quarters as it now emerges as a clear overhang on the stock."
"It’s difficult to say what the margin will be," Musk told investors. "It depends on what the macroeconomic environment is like ... if the Fed were to lower the rates, that would be super helpful for demand. If they raise them, that just raises the interest costs that buyers have to pay to buy a car. So it reduces affordability and therefore it reduces demand."
