Tesla bulls once pointed to eye-popping profit margins as evidence that the EV giant stood in another class compared with any other automaker, justifying the $1 trillion value of Tesla stock.
But that was in 2021 and 2022. This year, Tesla profit margins have plunged to below the company's self-described "floor," a fallout from huge price cuts starting in January that pushed deliveries to fresh highs.
To maintain sales momentum, Tesla has had to keep cutting prices. And competition is growing, from startups such as Nio, XPeng, Rivian, Lucid and EV giant BYD, as well as traditional automakers like General Motors, Ford Motor and Volkswagen. Meanwhile, production is revving up across the auto industry as Covid-spawned supply shortages and bottlenecks fade, pressuring vehicle prices broadly.
Yet bulls on Wall Street insist that Tesla profit margins will bottom out soon and start to rise in 2024. That would revive earnings growth and justify Tesla stock's megacap growth status. And if they're wrong? Tesla might become a "normal" automaker with modest margins and a more down-to-earth valuation.
While Tesla price cuts and expanded discounts have continued into September, Wedbush analyst Dan Ives believes the bulk of cuts are now in "the rearview mirror."
"Even though margins have been hit, I think it's going to be a key part of their success over the coming years that they made these moves now" to support sales and market share, Ives said.
The Tesla Cybertruck is among several possible future catalysts for margins after production ramps up, but the yet-to-launch vehicle has a host of unknowns. Other reasons analysts cite for margin optimism include the just-upgraded Model 3 as well as Supercharger revenue and Full Self-Driving.
Tesla CEO Elon Musk has dismissed concerns over "short-term variances in gross margins." He continues to argue that achieving true autonomous driving is the path to huge long-term margins by making Tesla vehicles far more valuable.
Investors have had a love-hate relationship with Tesla's price cuts. Tesla stock plunged in the 2022 bear market but the price bottomed with the early-January cuts. Shares have doubled in 2023. But with prices continuing to slide, Tesla stock has struggled somewhat recently.
Tesla Stock: Profit Margins Peak
Tesla's auto gross profit margins excluding regulatory credits peaked at 30% in Q4 2021. In hindsight, special factors contributed to that. Global supply disruptions of automotive chips and other parts slammed production at GM, Ford and other automakers. Tesla and China rival BYD were among the few carmakers that could ramp up output during this span.
With industry output crippled, Tesla raised prices multiple times.
In early 2022, Tesla's Berlin and Austin, Texas, plants came online, with a slow production ramp. In the summer, Tesla Shanghai's capacity increased substantially, while global auto industry production started to pick up.
Tesla's large order backlog quickly dwindled. The EV giant made significant China price cuts in October and offered hefty year-end U.S. discounts.
Tesla's core auto gross margin remained robust at 24.3% in Q4 2022. GM reported a 13.9% gross margin in Q4, while Toyota boasted 17.1%. BYD Auto gross margins were 22.8%. Tesla excludes R&D costs and some other expenses from its gross margin calculations, unlike most rivals, boosting its figures by a few percentage points.
But Tesla's new orders were running far below deliveries, which in turn were below output and especially production capacity. Tesla had to act aggressively.
Tesla Price Cuts In China
On Jan. 6, Tesla announced another big wave of price cuts in China. Huge price cuts followed in the U.S. and Europe on Jan. 12.
The U.S. base Model Y dropped by 28% vs. the beginning of the year, and an entry-level Model 3 was cut 14%. Model S and X prices have seen even sharper declines.
Overall U.S. prices for electric vehicles are down about 18% vs. last year, according to a recent Kelley Blue Book analysis.
The U.S. price cuts made the Model 3 and Model Y eligible for the new $7,500 federal tax credits under the Inflation Reduction Act. U.S. consumers can now order an entry-level Model 3 for $40,240 before IRA tax credits.
Tesla deliveries rose to 422,875 in Q1 from 405,278 in Q4 2022. In Q2, deliveries ran up to 466,140. But Tesla had to keep trimming prices along the way.
Tesla Price Cuts: Model S, X Prices
| Date | Model S | Model X |
|---|---|---|
| Jan. 1 | $104,900 | $120,990 |
| Jan. 12 | $94,990 | $109,990 |
| March 5 | $89,990 | $99,990 |
| April 6 | $84,990 | $94,990 |
| April 20 | $87,490 | $97,490 |
| May 11 | $88,490 | $98,490 |
| Aug. 14 | $78,490 | $88,490 |
| Sept. 1 | $74,990 | $79,990 |
The company has also slashed luxury Model S and X prices multiple times. The Model S long-range variant started the year at $104,900 but was down to $74,900 as of Sept. 1. The high-end Model S Plaid has come down from $135,900 on Jan. 1 to $89,990. The Model X long-range version is $79,990 vs. $98,490 recently and $120,990 on Jan. 1. The base Model X is now priced low enough to qualify for IRA tax credits.
The Lucid Air, a Model S rival, also has had big price cuts in 2023.
Price pressures are even greater for some models than the sticker prices indicate. For the Model 3 and Y — the vast majority of sales — Tesla has steadily increased inventory discounts in the U.S. and Europe, by well over 5% in many cases.
Model 3 inventory can be had for a bit more than $37,000 depending on the region, according to Tesla's website, around 10% off the list price.
A growing share of Tesla autos, perhaps 25%-40%, are being sold from inventory, according to Bernstein analysts in a Sept. 7 note, signaling a 1%-2% hit to average selling prices.
U.S. inventories have continued to climb, "a clear sign" that Tesla demand is still lagging production, Guggenheim analyst Ron Jewsikow wrote Aug. 30. He predicted more price cuts. The analyst kept a sell rating on Tesla stock with a 125 price target.
"There's clearly an inventory glut, and price cuts have been announced in response to it," CFRA analyst Garrett Nelson told IBD.
Tesla Profit Margins Fall
Tesla's core margins tumbled to 19% in Q1 and 18.1% in Q2.
Q2 auto gross margins, excluding regulatory credits and leases, fell below the 20% "floor" the company had targeted just a few months earlier.
Tesla Stock: Earnings Weaken
With profit margins falling, earnings have taken a hit. Q1 earnings per share fell 21% vs. a year earlier, even as revenue climbed 24% to $23.3 billion. In Q2, profits rose 20% as revenue swelled 47% to $24.9 billion, but that was largely due to easy comparisons vs. Q2 2022, when Covid shutdowns crippled Shanghai production.
For Q3, analysts project EPS will fall 24% vs. a year earlier to 80 cents, according to FactSet. Other than Q2 2022, that would be the lowest earnings in two years. Revenue should increase 16% to $24.94 billion, little changed vs. Q2. Deliveries are expected to climb 36% to a fresh high of 470,000, up 1% vs. Q2.
Analyst consensus forecasts put Tesla's core automotive gross profit margins holding steady at 18.1% in Q3, despite various price cuts and discounts since the end of June.
For the full year, Wall Street predicts earnings will fall 17% to $3.35 per share even as sales hit $100.08 billion, a 23% increase vs. 2022. The consensus view is also that auto gross margins will be 18% in 2023.
Jewsikow said in his Aug. 30 note that consensus auto gross margins and deliveries for Q3 are "overly optimistic." He sees Tesla's auto gross margins falling to 17.5% in Q3 and deliveries edging down to 460,000.
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Analysts expect Tesla to deliver 1.85 million vehicles in 2023. Musk said during the Q2 earnings call that the company is targeting 1.8 million deliveries.
The Tesla CEO also said, however, that third-quarter production will likely "be a little down," citing shutdowns for factory upgrades. Tesla output was already running well below capacity, while still exceeding deliveries significantly.
Tesla's annual production capacity is above 2 million vehicles, perhaps significantly more.
Tesla Enjoys Solid China Demand
Tesla China prices on the Model 3 and Y have been relatively steady since the big October and January cuts. That's despite significant moves by rivals in the fiercely competitive Chinese EV market.
"China is the hearts and lungs of the Tesla story," Ives, a longtime Tesla bull, said. "Fears of China growth have definitely been an overhang, but I believe the bark is worse than the bite there."
The EV giant did trim prices on some Model Y variants in August but not on the popular base version.
"Most of the price war that's taking place in China, I think, has already played out," Ives said.
Despite his overall bearish view on Tesla, Jewsikow wrote Aug. 30 that "China weekly delivery data has been strong in August." He added that he is "less concerned about China demand trends relative to U.S. and Europe."
Competition continues to swell, especially for the Model Y. XPeng is ramping up deliveries of its new G6 crossover SUV. Meanwhile, Nio is banking on its next-gen version of its top-selling ES6. BYD's Denza unit has recently started deliveries of its N7 crossover, with the BYD Song L expected by year-end.
But Tesla sales in China have been resilient so far.
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Tesla Model 3 Upgrade
Tesla's new Model 3 is now on presale in China with prices starting at about $35,850, 12% more than the old version. Better aerodynamics reportedly make the "Highland" Model 3 roughly 8% more efficient.
Deliveries in China are expected to begin in Q4. The upgraded EV is expected to go on sale in Europe in October.
The new Model 3 reportedly is cheaper to make, though Tesla hasn't confirmed that. If true, that could mean a boost to margins, especially if prices are higher.
The higher initial price — a surprise to some — may reflect limited supply of the new Model 3 to start.
Tesla's Fremont, Calif., plant should make the updated Model 3 for the U.S. market in a few months, but it's not clear when.
Margin Recovery Ahead
Analysts generally expect a margin recovery, but differ on the timing and the trajectory.
Ives, who previously expected Tesla margins to bottom in Q3, now sees that happening in Q4. Ives see margins back above 20% in 2024.
CFRA's Nelson doesn't expect profit margins to bottom out until Tesla achieves production of scale for its highly anticipated Cybertruck. "The Cybertruck could further dilute their margins in the near term," Nelson said. "They're going to be in the ramp-up phase, and when you're not producing a model at volume, it tends to negatively impact margins."
Morgan Stanley analyst Adam Jonas on July 24 wrote that he expects Tesla's full-year auto gross margins to remain below 20% until 2025.
The Wall Street consensus predicts they'll be 18.7% next year and not above 20% until 2025. Earnings are expected to rebound 42% in 2024 to $4.75 a share.
Of course, Tesla prices have to stabilize, and when is still unclear. While Ives sees that happening soon, Bernstein analyst Toni Sacconaghi said in the Sept. 7 note that Tesla prices could slide well into 2024.
Ives sees Tesla's supercharging network, its battery technology and Full-Self Driving (FSD) as fueling margins.
GM, Ford and several other automakers in recent months have agreed to adopt Tesla's charging standard. Tesla will open many of its Superchargers to non-Tesla vehicles. That should boost Supercharger revenue and let Tesla tap new subsidies.
But there is a downside. Tesla's widespread, easy-to-use Supercharger network has been a big moat, especially in the U.S. Now people may be more comfortable buying rivals' EVs.
Tesla's ability to monetize its battery technology and FSD might require some technical breakthroughs.
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Tesla Cybertruck To The Rescue?
The Tesla Cybertruck will be the EV maker's first new passenger vehicle since the Model Y launched in early 2020. As of late August, Tesla observers estimate total Cybertruck production at the Austin plant to be around 100 units so far.
| Year | Tesla EV avg. selling price |
|---|---|
| 2019 | $56,000 |
| 2020 | $51,000 |
| 2021 | $48,940 |
| 2022 | $53,040 |
| 2023e | $45,160 |
| 2024e | $43,870 |
| 2025e | $43,000 |
Source: FactSet
Ives believes Tesla Cybertruck production could hit 200,000 to 300,000 annually once it fully ramps up by 2025.
He sees the Cybertruck as a direct competitor to Ford, General Motors and Rivian in the popular U.S. pickup truck market.
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However, Tesla still hasn't released prices or key specs that would affect Cybertruck demand and profitability. It's still unclear how close Tesla is to mass production, or even if it's settled on a final production model.
Elon Musk said during the Q2 earnings call that Tesla would hold a Cybertruck delivery event before year-end, but has since hedged.
"It is an extremely difficult product to build," Musk recently wrote on X, formerly called Twitter. "We are in uncharted territory, because it is not like anything else."
EV Competition
Rivals' rising EV production and the auto production revival are broadly negative for Tesla's profit margins.
But CFRA's Nelson sees some positives on this front, especially in the U.S.
Tumbling electric vehicle prices and IRA tax credits have "contracted" the premium on EVs, making them more competitively priced with traditional vehicles, he notes.
Also, at least in the U.S., Nelson believes Tesla will actually face less EV competition over the coming months, with Ford pushing more hybrids as its EV unit suffers big losses.
"There's been a subtle shift of strategy more toward the production of plug-in hybrids, which we think favors Tesla with less pure-play EV competition," Nelson said.
Still, the longer-term trend in the U.S. and worldwide is for a big increase in EV production.
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Tesla FSD Technology
Maybe the greatest unknown for Tesla is the trajectory of Full Self-Driving technology. Musk has long touted FSD as being on the cusp of full autonomy. But, despite its name, FSD remains a Level 2 driver-assist system. Drivers must pay attention at all times, keeping their hands on the steering wheel and ready to take over
The Tesla CEO has told investors that the "value of a car that is autonomous is enormous" and has claimed Cathie Wood's high valuation of Tesla and of FSD is realistic.
On April 20, Wood's ARK Invest predicted Tesla stock will reach a $2,000-per-share price in 2027, compared with around 250 now. The firm sees Tesla's autonomous "robotaxi business" as a "key driver" for this estimated valuation. ARK Invest predicts an average Tesla vehicle price of $26,000-$34,000 in 2027, with total auto gross margins of 23%-34%.
ARK previously forecast that Tesla robotaxis would already be generating significant revenue by now.
On Sept. 1, Tesla reduced the price of FSD in the U.S. to $12,000, down from $15,000.
Nelson told IBD that the Tesla stock valuation "somewhat reflects FSD innovation that hasn't even occurred yet." The analyst added that Musk has a long track record of overhyping automated driving capabilities.
"He normally delivers," Nelson said of Musk. "It's just rarely on the timeline that he promises initially."
The National Highway Traffic Safety Administration is close to ending a two-year investigation into Autopilot and FSD, Reuters reported on Aug. 24. It's unclear if NHTSA regulators will take significant action against the EV giant.
Tesla Stock Performance
Where does all this leave Tesla shareholders?
To a large extent, investors have cheered Tesla price cuts in 2023, despite their impact on margins.
TSLA stock plunged 65% in the 2022 bear market as it became clear that Tesla orders were plunging.
Shares bottomed at 101.81 on Jan. 6 as the broader market staged a follow-through day, confirming the new 2023 uptrend. That's also when Tesla kicked off its huge price cuts which, along with new U.S. tax credits, fueled a big demand boost.
Tesla stock more than doubled in six weeks. After consolidating for a few months, shares broke out again, spiking to a 2023 high of 299.29 on July 19, hours before Q2 earnings were released.
But shares sold off following the results, which showed margins again falling.
Tesla stock ramped back up in late August, in part on Cybertruck and Model 3 buzz. But the Highland Model 3 launch on Sept. 1 turned into a buzz kill, thanks to the big Model S, Model X and FSD price cuts. Tesla stock fell solidly that day before rebounding the following session.
The stock could be setting up for another run. But it's all a bet that Tesla earnings and profit margins will rebound next year.
Please follow Kit Norton on X/Twitter @KitNorton for more coverage.
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