Tesla (TSLA) shares slumped lower Wednesday as the carmaker unveiled a fresh round of U.S. price cuts in a move that highlights a key investors concern ahead of its highly-anticipated first quarter earnings after the closing bell.
After a modestly disappointing set of deliveries for the three months ending in March, which Tesla published on April 3, analysts now expect the group to post earnings of 85 cents per share, down around 20% from last year's levels, with revenues rising 24% to $23.29 billion.
The difference will likely be reflected in Tesla profit margins, which are set to narrow substantially from last year following a series of price cuts in key markets put in place since January - including a fresh set in the U.S. last night.
Tesla lowered the price of its base Model Y SUV by around $3,000, extending this year's price reduction to around 20%, 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.
So far this year, the price cuts have had a mixed impact: 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.
Musk's 2 Million Target
It's also shy of the pace 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.
The more immediate concern, however, is the hit Tesla is taking on profits. Automotive gross margins, likely the key metric from today's earnings, narrowed to 25.9% over the three months ended in December, the lowest in two years and level that was more than 200 basis points south of the previous quarter.
Musk put the margin pressures down to battery-production costs, the ramp up of factories in Berlin and Texas, higher commodity costs and price cuts.
"Price really matters for EV sales," Musk told investors on a conference call after the company's earnings report. "Our price cuts will make a difference to the average consumer looking to buy a Tesla. Our goal is to make our cars as affordable as possible."
Tesla CFO Zach Kirkhorn made an effort to defend those figures from falling below the 20% threshold, which many analysts see happening before the end of the year.
During an Investor Day presentation last month in Austin, he said the group would halve EV-production costs over the coming years as it aimed to significantly ramp up capital spending to meet its stated goal of producing 20 million cars per year by 2030.
Narrowing Margins
"The Model Y/3 price cuts implemented early in 2023 have paid major dividends for Musk & Co. as demand appears very solid despite an uncertain macro," said Wedbush analyst Dan Ives, who carries an 'outperform' rating and a $225 price target on the stock. "That said, price cuts come at a price and this tug of war between volumes and margins is now the big debate on the Street heading into earnings and the rest of FY23."
"The big question will be margin deterioration, as cutting prices will naturally have a negative impact on this front, although we believe (an automotive gross margin) north of 20% remains the key threshold over the coming quarters," he added.
Morgan's Stanley's Adam Jonas , who carries a 'buy' rating with a $220 price target on Tesla, has argued that Tesla's goal of a minimum first quarter margin of 20% "may prove difficult to defend in subsequent quarters in the event of continued downward price competition and slowing economic growth following recent events in the global banking sector and knock-on impacts on the consumer."
Tesla shares were marked 1.4% lower in early Wednesday trading to change hands at $181.80 each, a move that would still leave the stock with a year-to-date gain of around 47%.
Short interest in Tesla shares remains elevated, however, with bets against the group pegged at around $15 billion, according to recent data from S3 Partners, a figure represents around 2.97% of the group's shares outstanding.
David Trainer of Nashville-based investment research group New Constructs thinks the short interest levels are justified, particularly in light of the price cuts put in place to maintain market share.
"Tesla has burned over $4 billion in cash over the past five years and will have to burn much more cash in order to avoid massive market share losses," Trainer said.
"We believe Tesla's massive year-to-date stock rally is totally unjustified. Investors are way too optimistic and the cash flow expectations baked into its stock price are too high," he added. "The stock is worth $25 in our view."
