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The markets eagerly await Tesla’s (TSLA) quarterly earnings results after the markets close today for clues about how the company’s price cuts have impacted profit margins. The recent price cuts by Tesla have prompted analysts to cut their Q1 gross margin estimates on the stock by about 20% since late December. However, the stock has rallied nearly 50% this year, leaving room for disappointment.
Shares of Tesla have rallied sharply this year as investors jumped back into growth assets on speculation the Federal Reserve is close to ending its rate-hike campaign. Also, Tesla received a boost from the Biden administration’s Inflation Reduction Act, which provides buyers of electric vehicles a tax rebate if the battery components or raw materials were sourced from North America or countries with U.S. free-trade agreements.
Fernwood Investment Management is concerned the recent rally in Tesla may have gotten ahead of itself, saying, “margins are going to be very consequential with the market trying to decide does this stock keep running or does it have a little pull back.” Tesla’s share price is down more than -1% today after it announced price cuts on its U.S. Model 3 and Model Y new cars, the second price cut this month.
With this year’s surge in Tesla’s stock price, its valuation has risen substantially, with the stock trading around 47 times forward earnings, compared with single-digit multiples for Ford Motor (F) and General Motors (GM). The S&P 500’s forward earnings multiple stands at around 19 times. According to Bloomberg estimates, Tesla’s Q1 gross margin will decline to 23% from 25.9% in Q4. Profit predictions have fallen -28% since late December to 86 cents a share.
Some analysts are optimistic that Tesla can maintain a strong advantage over rivals in terms of profitability, despite the company’s recent price cuts. Analysts estimate Tesla’s 2023 overall gross margin at around 22%, compared with 17% for General Motors and 15% for Ford Motor. Morgan Stanley said, “Tesla represents a better risk-adjusted investment opportunity compared to most other EV-related names. We believe the company’s cost and engineering leadership will, over time, provide greater growth potential and adjacent revenue opportunity vis-a-vis the competition.”
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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
