Tesla’s aggressive price cuts have led to a decline in its quarterly gross margin, reaching a more-than four-year low. However, the electric car manufacturer remains committed to its annual production target, indicating a strong demand.
In the third quarter, Tesla’s revenue, profit, and gross margin fell short of analysts’ expectations. Nevertheless, the company has expressed its intention to continue reducing production costs to increase profitability.
To survive the price war it initiated in January, Tesla is striving to capture all available interest in electric cars in the market. Despite challenges such as high interest rates and competition from other brands, the company may have to further lower prices to reach its goal of producing 1.8 million cars annually.
Tesla stated that the upgrades made to its factories in the third quarter would help reduce production costs. The company emphasized the importance of being a cost leader in the industry.
Compared to the previous year’s gross margin of 25.1%, Tesla’s gross margin dropped to 17.9% in the quarter ended September. The carmaker had yet to implement price cuts at that time. In the second quarter, Tesla’s gross margin was 18.2%.
“I can’t argue that they won’t cut prices further because things are obviously tougher with higher interest rates, but I think they’re awfully close to those trough margins,” said Gary Bradshaw, portfolio manager at Tesla shareholder Hodges Capital Management.
According to Visible Alpha’s poll of 21 analysts, Wall Street estimates predicted that Tesla would achieve a margin of 18.02%. LSEG data, based on an average of 17 analysts’ opinions, projected a margin of 18.25%.
Tesla’s automotive gross margin, excluding regulatory credits, fell to 16.3% in the third quarter from 18.1% in the second quarter.
Despite a reduction of around $2,000 per vehicle in raw material costs during the past quarter, Tesla’s margins continued to decline.
The underutilization of new factories and increased operating expenses, driven by upcoming models like the Cybertruck, artificial intelligence investments, and other projects, negatively impacted Tesla’s margin.
Cybertruck pilot
Following the release of its third-quarter results, Tesla’s stock experienced volatility in after-hours trading, fluctuating between a 1% gain and 2% loss. The stock had closed down 4.8%.
Investors remain optimistic about Tesla’s prospects, as the company’s stock has more than doubled in value this year. They believe that Tesla will outperform its competitors in the challenging economic climate and benefit from the long-term potential of its self-driving software.
Tesla announced that it has started pilot production of the Cybertruck at its Texas Gigafactory, with the first deliveries scheduled for November 30. However, CEO Elon Musk warned of “enormous challenges” in achieving volume production and positive cash flow for the Cybertruck.
“I just wanna temper expectations for Cybertruck. It will take a year to 18 months before it becomes a significant positive cash flow contributor,” Musk mentioned during a call with analysts.
The highly-anticipated Cybertruck will enter a competitive market, challenging models like Rivian’s R1T, Ford’s F-150 Lightning, and General Motors’ Chevrolet Silverado.
In the third quarter, Tesla’s revenue increased by 9% to $23.35 billion, falling short of analysts’ estimates of $24.1 billion. This marks the slowest growth rate in over three years for the company.
The average revenue per unit declined by nearly 11% compared to the previous year.
On an adjusted basis, Tesla earned 66 cents per share. According to LSEG data, analysts had expected a profit of 73 cents per share. It is unclear whether the numbers are directly comparable.
Tesla revealed that its energy and services businesses, including solar panels, batteries, and other services, have become significant contributors to profit, generating over $500 million in combined gross profit in the quarter.
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