Tesla Saw its Profits Slump in Q1, but Chases Volume Over Margins

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  • TSLA.us
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  • VOW.de
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Profit Slump

Tesla Motors Inc has made a series of price cuts to its vehicles over the past several months, which has lowered the entry level significantly, as the Model 3 currently starts just below $40,000 in the US [1]. The multiple reductions though, created concerns around the firm's industry leading margins.

The EV giant released its highly anticipated financial results for the first quarter of the year on Wednesday after US market close, which showed that both the top and bottom line were negatively impacted by the "reduced" average selling price (ASP) of its vehicles. [2]

Revenues of $23.329 billion were higher compared to a year, but declined on a quarterly basis, while Net Income slumped by 24% y/y and by more than 30% compared the previous quarter.

Gross Margins dropped below 20% for the first in over two years, marking a decline in both quarterly and sequential basis. Operating Margins were also squeezed to 11.4%.

Push For Volume Over Margins

The company did not seem to be overly concerned about the hit to its profitability by the lower selling prices, noting that the operating margins declined at a "manageable rate", expecting it to remain "among the highest in the industry"

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The truth is that Tesla is better positioned to withstand a potential price war, due its robust margins. The Ford Motor Company for example who recently slashed prices for its Mach- E electric SUV, had EBIT Margin of 6.6% in 2022 [3], compared to Tesla's 16.8% Operating margin in the same year. [4]

Furthermore, the company has determined that the best strategy is to prioritize higher production levels, over higher margins, according to CEO Elon Musk. During Wednesday's earnings call, he noted that "We've taken a view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin". [5]

His Chief Financial Officer Zachary Kirkhorn also highlighted the decision to "grow volumes as quickly as possible", while acknowledging the adverse impact of price cuts on the Q1 profits.

Production & Delivery

Tesla Motors Inc is determined to keep scaling up production and maintained the manufacturing target at around 1.8 million this year. Mr Musk spoke of potential for 2 million "if things go well", during the earnings call. [5]

The firm reached new records in the first quarter, with the production of 440,808 and the delivery of 422,875 vehicles, marking a 44% and 36% y/y growth respectively. However, a comparison with the fourth quarter is not that encouraging, since output was basically flat.

Over recent quarter, there has been seizable gap between production and delivery, which has caused concerns around demand and has likely been one of the reasons behind the multiple price reductions. Although Mr Musk had dismissed such worries in January, the output/delivery gap persisted in Q1, although it was narrower compared to the previous quarter.

New Models

Tesla launched just one vehicle last year, as it focused on ramping up output volumes. This was not a passenger car, but the Semi truck, deliveries of which started in December to Pepsi (PEP.us) [6]. The Roadster meanwhile has not been mentioned in a while, but that is in any case likely to be niche product.

During the Investor Day in March, company executives outlined a next generation platform that will lead to a 50% reduction in costs and 40% less manufacturing footprint [7]. This suggests that Tesla is moving towards a cheaper car, which was part of Elon Musk's original Master Plan from all the way back in 2006 [8] , but no specifics were announced.

However, all eyes this year will be on the long-awaited and futuristic Cybertruck, which Elon Musk Hyped up again yesterday, speaking of "a fantastic product, a hall of famer" [5]. After multiple delays, the CEO expects deliveries to begin "probably" in the third quarter.

Since it was first unveiled back in 2019 though, other automakers have taken the pick-up segment by storm. EV startup Rivian Automotive beat everyone to the punch with its impressive R1T, which got the coveted 2022 Truck of the Year by MotorTrend [9]. The electric variant of Ford's best- selling truck, the F-150 Lighting, got the same award for 2023. [10]

Increased Competition

Tesla Motors Inc is the undisputed leader of the electric vehicle (EV) arena, with its CEO Elon Musk having essentially created the market. It still far ahead than its rivals and pushes on various fronts, including manufacturing efficiency, new factories, lithium refinery and more.

Furthermoe, it has done a better job in managing recent supply chain disruptions, is in a better a position to sustain a potential price war and to weather the high inflation and the adverse monetary environment, to which EV startups are more exposed. However, legacy automakers and startups are making strides in electrification, having already mentioned how Ford and Rivian beat it on the electric pickup market.

Auto giant Volkswagen (VOW.de) premiered its latest electric vehicle, the ID.7, to compete against Tesla Model 3. It also recently announced an entry-level electric, to be priced at just 25,000 by 2026 [11], as Tesla has yet to provide any specific around such an offering. European high-end rival Mercedes (MBG.de) will try to take on Tesla's Model Y, with the luxury EQS SUV, which it unveiled this week. [12]

Chinese startup Nio (NIO.us) is expected to begin deliveries this quarter of its ES8 flagship SUV and the new EC7 flagship coupe SUV and has already expanded into the European market [13]. Li Auto (LI.us) meanwhile saw its Q1 deliveries soaring to 52,584 units, saying that it has now 20% market share in China. [14].

Tesla Stock

After a poor 2022, TSLA.us made an explosive start to the current year, with nearly 70% rise in the first quarter. However, it has filed to move past the EMA200 and loses ground in April.

Markets reacted negatively to the profit slump announced on Wednesday and Tesla's stock dropped in extended trading.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 20 Apr 2023 https://www.tesla.com/model3/design#overview

2

Retrieved 20 Apr 2023 https://tesla-cdn.thron.com/static/ZXSBN8_TSLA_Q1_2023_Update_ABMJPG.pdf

3

Retrieved 20 Apr 2023 https://s201.q4cdn.com/693218008/files/doc_financials/2022/q4/2.2.23-People-Plan-Products-Position-Ford-Well-for-'Pivotal'-2023-Despite-Effect-of-Volume-Shortfall-on-Q4-Full-Year-2022-Results.pdf

4

Retrieved 20 Apr 2023 https://tesla-cdn.thron.com/static/SVCPTV_2022_Q4_Quarterly_Update_6UDS97.pdf

5

Retrieved 20 Apr 2023 https://www.youtube.com/watch

6

Retrieved 20 Apr 2023 https://www.youtube.com/watch

7

Retrieved 20 Apr 2023 https://www.youtube.com/watch

8

Retrieved 20 Apr 2023 https://www.tesla.com/blog/secret-tesla-motors-master-plan-just-between-you-and-me

9

Retrieved 20 Apr 2023 https://www.motortrend.com/news/rivian-r1t-2022-truck-of-the-year/

10

Retrieved 20 Apr 2023 https://www.motortrend.com/news/ford-f-150-lightning-2023-truck-of-the-year/

11

Retrieved 20 Apr 2023 https://www.volkswagen-newsroom.com/en/press-releases/world-premiere-for-the-efficiency-champion-volkswagen-id7-with-a-range-of-up-to-700-km-wltp-15735

12

Retrieved 20 Apr 2023 https://group-media.mercedes-benz.com/marsMediaSite/en/instance/ko.xhtml

13

Retrieved 20 Apr 2023 https://www.nio.com/news/nio-day-2022

14

Retrieved 18 May 2023 https://ir.lixiang.com/news-releases/news-release-details/li-auto-inc-march-2023-delivery-update

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