[ad_1]
Tesla’s decision to repeatedly cut EV prices put pressure on margins, causing third-quarter profit to fall 44% to $1.85 billion, the company reported Wednesday.
Tesla reported revenue of $23.35 billion in the third quarter, which increased 9% year over year due to higher vehicle deliveries and growth in other parts of its business. Analysts polled by Yahoo Finance had estimated revenue of $24.1 billion.
Although sales growth is positive, the company’s consistent price cutting has led to a decline in margins – a trend that has continued for the past several quarters. Tesla reported a gross margin of 17.9% in the third quarter, down from 25.1% in the same period last year. This is also down from the second quarter when it reported a margin of 18.2%.
The automaker missed Wall Street estimates on revenue and earnings. Shareholders seemed to be getting ready for Tesla’s third-quarter earnings early in the day, with shares falling 4.78% to close at $242.68. Shares were up 1.5% in after-hours trading.
Tesla closed the third quarter with free cash flow of $800 million, down from $1 billion the previous quarter.
Price cuts and costs
Tesla largely blames its falling profitability margins reduction in vehicle prices, In the third quarter, Tesla cut the prices of its Model S and Model X luxury vehicles by up to $18,500 per car. Price cuts for the more popular and affordable Model 3 and Model Y continued in October.
Tesla also pointed to rising operating expenses driven by Cybertruck, AI and other R&D projects, about which the company provided more details. The cost of idling its Fremont, California factory to upgrade and ramp up production also reduced its net income. Tesla also cited foreign exchange effects as a negative factor.
On the positive side, the company pointed to increased vehicle deliveries, lower costs per vehicle and a $7,500 Inflation Reduction Act credit benefit, gross profit growth in its energy storage business and an increase in regulatory credits. Tesla brought in $554 million in zero emissions tax credits in the third quarter, nearly double the amount it received in the same period last year.
Outlook
Tesla hasn’t changed its outlook for the year and said it still plans to deliver 1.8 million vehicles by the end of 2023.
In the third quarter, Tesla delivered 435,059 vehicles, down about 7% from second quarter deliveries. However, this was expected due to planned factory closures.
If Tesla wants to hit its 2023 sales target, it will need to close the gap of 480,000 vehicles. The Cybertruck will likely fill that void. But with the delivery schedule now scheduled for November 30, some deliveries are expected by the end of the year.
This means there could be a price cut strategy for the fourth quarter. This is especially true if we zoom out and look at China sales, which have seen some softness. Demand for Tesla vehicles in China, which has historically been a top market for the automaker, is waning as local EV companies like BYD gain market share.
“Pricing is a key factor that could help Tesla offset a potential demand decline and boost revenue,” said Jesse Cohen, senior analyst at Investing.com. “As such, I would not be surprised if Tesla seeks further price increases in the coming weeks as some of its competitors, including Lucid Motors and Rivian, begin to run into trouble.”
Cohen added, “The bigger question is whether this is merely a blip, or a sign of a larger shift among consumers as rising interest rates and a weak economic backdrop discourage consumers from making larger purchases.”
