Cheaper Teslas hurt profits, but Musk still wants to cut prices

• Tesla’s profit margins tumbled last quarter after the electric vehicle maker made aggressive price cuts.
• During an earnings call, CEO Elon Musk said he would continue with the strategy.
• Musk could sacrifice short-term profits to increase Tesla’s market share.

Tesla disappointed its shareholders on April 19 by revealing how its aggressive price cuts had affected its business.

The automaker began slashing the price of its Model Y SUV and Model 3 sedan in January – and its latest earnings report showed profit margins dropped dramatically in the last quarter.

On a call with investors, CEO Elon Musk hinted he would pursue the strategy in an effort to drive customers away from traditional automakers and electric vehicle rivals.

But analysts have warned that Tesla may have to sacrifice short-term finances to increase market share – and it may be too early to tell whether the price war will help or backfire.

Disappointing income

Tesla has lowered its prices six times this year.

The entry-level Model 3 now costs less than $40,000, down from $62,990 at the start of the year. The Model S and Model X are also 20% cheaper than they were at the start of 2023, even after Tesla raised prices in the United States on Thursday.

But those cuts have eaten away at Tesla’s profit margins. In Wednesday’s earnings report, the company revealed that its profit plunged 24% year-on-year to just over $2.5 billion.

Shares fell nearly 10% at market close Thursday, wiping out a valuation of $56 billion, a figure larger than Ford’s market capitalization.

Wall Street had expected margins to fall, but traders were likely surprised at the magnitude of the decline, according to Morningstar stock analyst Seth Goldstein.

“The magnitude of the decline in margins was less than I expected and the market also expected,” he told Insider. “That’s why we saw the stock sell off, it was a reaction to that.”

Tesla wants market share

During Wednesday’s earnings call, Musk told investors the company would put sales growth ahead of earnings in a weak economy.

“We felt that pushing for higher volumes and a larger fleet is the right choice here versus lower volume and higher margin,” he said.

Musk’s willingness to pursue a profit-generating strategy suggests he could be targeting a market occupied by traditional automakers. Ford was one of the only mainstream automakers to respond to Tesla’s cuts in January, lowering the price of its Mustang Mach-E, but it has made no further cuts.

Although price competition is not uncommon in the auto industry, automakers could struggle to match the size of Tesla’s cuts without hurting their own profit margins.

“I think traditional automakers are scrambling right now – are they cutting prices or selling fewer EVs at a higher price to preserve profits? They are faced with a choice between cutting prices or hurting further more to earnings. It makes for an interesting scenario in terms of reaction,” Goldstein said.

Musk’s cost-cutting could boost long-term margins

Tesla’s margins fell last quarter as price cuts ate away at revenue, but margins could rebound if Musk manages to cut costs.

Musk and other executives said Tesla would bring innovative manufacturing techniques and use smaller factories during a March 1 presentation. The EV maker is also reportedly developing a cheaper model, which is expected to cost around $25,000.

“They pass on those cost savings that they make to the consumer, where I think historically it would just be a margin that would go on the books of the automaker,” said Caspar Rawles of Benchmark Mineral Intelligence, a pricing agency. , Insider previously said.

“But Elon has hinted that they have a mandate to try to keep the price down for these vehicles, which obviously has been extremely difficult over the last couple of years with all the supply chain issues they’ve been dealing with. faced,” he added.

By cutting prices and aggressively cutting costs, Tesla is choosing to take short-term profit losses in exchange for longer-term market share gains – but it will be some time before Musk can. say if it was the right approach.

“Right now, it seems like the competitive position of the business is taking precedence over protecting profitability,” AJ Bell chief investment officer Russ Mold said Thursday. “Only time will tell if this is the right decision.”