Tesla (TSLA) -) is likely to post record second-quarter sales, following an all-time high in overall vehicle deliveries. But the ongoing price war in the EV market is likely to bite deeper into the group's profit margins and challenge the stock's astonishing 2023 rally.
Analysts expect Tesla's overall revenue to rise 45% from a year earlier to $24.5 billion, an all-time high, following its record tally of 466,140 new EV deliveries over the three months ended in June.
The group's adjusted bottom line, however, is forecast to rise just 8% from a year earlier, to 82 cents a share. The increase reflects Chief Executive Elon Musk's decision earlier this year to focus on market-share gains over profit by initiating significant price cuts in key markets and boosting referral incentives.
Despite recent tweaks to the upside, prices for the Model Y midsize SUV are down around 24% since the start of the year, with the prices for the popular Model 3 sedan down 14%. Earlier this month, in fact, Tesla unveiled a series of rebates for buyers in the U.S., China and Europe as part of its "Refer and Earn" program.
Those moves are likely to further pressure the group's automotive margin, a key profit metric on Wall Street, following its thinnest tally in two years over the first three months of the year.
'Aggressive Price Cuts, Near-Term Pain': Ives
"As we have discussed, the aggressive price cuts were a near-term pain for long-term gain strategic move for Tesla to put an iron fence around its installed base and gain new EV customers by cutting prices in a choppy macro backdrop," said Wedbush analyst Dan Ives, who carries an overweight rating and $300 price target on Tesla stock.
"So far this has been a home run strategy and now it's all about margins trough, no more price cuts, and demand remaining firm with some Model 3 and Y refreshes also likely on the horizon followed by the drum roll for the Cybertruck later this year," he added.
Elevated production costs, uneven supply chains and expenses linked to the ramp up of new factories in Texas and Germany are also expected to clip overall margins this quarter.
Wall Street forecasts peg the closely tracked adjusted figure to come in at 17.5%, a five-percentage-point slump from the year-earlier period.
Musk in late April warned investors that Tesla would likely focus on growing sales volumes and extending its lead in key markets over improving profitability. He justified that as a necessary step in its plan to generate recurring revenue, and longer-term earnings growth, 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 on April 19. "However, we expect our vehicles over time will be able to generate significant profit through autonomy."
Tesla's price war has also echoed throughout the auto industry, sparking an uneasy truce among rival EV companies in China, all of which earlier this month signed a pledge against "abnormal pricing."
Tesla sold just under 250,000 cars in China over the second quarter, well ahead of last year's covid-affected tally, according to data from the China Passenger Car Association.
China's EV sales could accelerate further into the summer months as well, after state media reports suggested last week that the government would extend tax breaks for the purchase of so-called new-energy vehicles.
Tesla Price Cuts a 'Worrying Trend': Ford's Farley
Ford's (F) -) CEO, Jim Farley, had called Tesla's EV price cuts a "worrying trend." Earlier this week he was forced to lower the base of its bestselling F-150 Lightning by around $10,000.
Others are likely to follow, but with Tesla holding a commanding lead in key markets, it may well benefit from an extended price war, argues Morgan Stanley analyst Adam Jonas.
"Slowing sales and rising inventory may force a 'recalibration' of legacy auto EV strategies even sooner than we expected," said Jonas, who has an equal-weight rating and $250 price target on Tesla stock. "We see Tesla earning a larger slice of the EV pie."
Ives at Wedbush notes, however, that Tesla's longer-term value isn't linked solely to its EV sales. He cites recent deals with legacy rivals such as Ford and General Motors (GM) -) to use its network of 12,000 fast chargers based on the Tesla North American Charging Standard.
Tesla's deals with Ford and GM to share a single charging system represent a central plank in President Joe Biden's effort to accelerate adoption of electric vehicles under his Green Economy agenda. And they underpin the extension of billions in related federal subsidies for EV buyers.
That said, they substantially increase the number of people who can access Tesla chargers, creating more competition for spaces at charging stations. That could annoy Tesla users, who are accustomed to exclusive access to those facilities.
"We believe 'what has changed' for the Street over the last few months is the recognition with the Ford and GM supercharger partnerships that Tesla's sum-of-the-parts valuation is now finally starting to get tapped into," Ives said.
"This reminds us of when the Street started to realize the margin story and valuation at AWS for Amazon (AMZN) -) and the growth/margins of the Apple (AAPL) -) services story in Cupertino."
Tesla Faces Second-Half Headwinds
Near-term headwinds for the stock, however, remain and Wells Fargo analyst Colin Langan says the 68% runup its enjoyed over the past two months will be difficult to sustain.
"We are cautious about Q2 auto gross margins given price cuts, and we are concerned about volumes heading into the second half of the year," said Langan, who carries an equal-weight rating with a $265 price target.
That view was echoed late last month by Goldman Sachs analyst Mark Delaney, who lowered his rating on Tesla to neutral from buy. He said the stock's recent rally could be giving "more credit for its longer-term opportunities" while not properly discounting near-term pressure on profit margins tied to a difficult pricing environment.
Tesla shares were last seen trading 0.9% lower on the session at $287.88 a share, a move that would peg the stock's year-to-date gain at around 134% and value the Austin carmaker at just over $900 billion.
Tesla is expected to publish its second-quarter earnings just after the close of trading on Wednesday, with a conference call scheduled for 5:30 p.m. U.S. Eastern.
