Tesla Inc (TSLA)

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Tesla Profit Margins Are Tumbling.

Investor's Business Daily

Tesla (TSLA) 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 (NIO), XPeng (XPEV), Rivian (RIVN), Lucid (LCID) and EV giant BYD (BYDDF), as well as traditional automakers like General Motors (GM), Ford Motor (F) and Volkswagen (VWAGY). 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.

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.

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.



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.

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 sales, 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.

Tesla Profit Margins Fall

"There's clearly an inventory glut, and price cuts have been announced in response to it," CFRA analyst Garrett Nelson told IBD.



Tesla 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.

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.

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."

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.