Tesla Inc., led by CEO Elon Musk, is pursuing a daring approach by reducing the prices of its electric vehicles (EVs) to stimulate demand, even if it means sacrificing its industry-leading profit margins. Musk believes that Tesla can financially endure these price cuts, which gives the company an advantage over its competitors. However, investors seem uncertain about this strategy, as Tesla’s stock experienced a decline in aftermarket trading.
Tesla’s Focus on Higher Volume and Larger Fleet
Musk stated during a call with analysts that the company is prioritizing higher volumes and a more extensive fleet over lower volume and higher margins.
As a result, the base price of the Model 3 has dropped below $40,000 in the US for the first time in years – approximately $7,000 less than at the beginning of the year.
This price reduction has had a noticeable impact on the company’s income. Tesla’s operating margin for the first quarter was 11.4%, down from 16% in the previous period and 19.2% a year ago.
The Austin, Texas-based company declined to provide its automotive gross margin, a metric closely monitored by investors, for the first time in years. Instead, Tesla only mentioned that it fell from the fourth quarter.
Tesla’s Margin Shrinkage and Capital Expenditure
Chief Financial Officer Zachary Kirkhorn assured analysts on the conference call that Tesla’s capital expenditure programs to increase output in the coming years have not been compromised. Remarkable, given the margin shrinkage. He added that the company has ample room before revisiting its strategy.
Even with the first-quarter slump, Tesla maintains higher margins than other automakers. In 2022, General Motors Co. had an operating margin of 6.6%, while Ford Motor Co. reported a 4% margin. Tesla executives emphasized that the company still boasts some of the best operating margins in the industry.
Tesla’s Financial Performance and Future Outlook
In the first quarter, Tesla’s revenue increased by 24% to $23.33 billion, almost in line with Bloomberg estimates of $23.35 billion. However, profit excluding specific items fell to 85 cents a share, slightly below the 86-cent average of Bloomberg estimates, and free cash flow dropped to a two-year low of $441 million.
The company’s shares fell more than 6% in late trading in New York after Musk revealed his strategy. Despite this decline, the stock was up 47% this year through Wednesday’s close.
Gene Munster, a managing partner at Deepwater Asset Management, commented, “Tesla is going through a rough patch. They are holding things together, but investors want to see some of these trends start to improve.”
Tesla confirmed that its output for the year would meet previous guidance for compound average annual growth of 50% over multiple years, with the company on track to deliver around 1.8 million vehicles in 2023. The EV manufacturer produced 440,808 cars and delivered 422,875 vehicles in the quarter, resulting in an excess inventory of about 18,000.
Musk assured analysts that orders now surpass production to alleviate concerns about this surplus.