Tesla Drops 4.5% After Hours as Margins Disappoint

A series of aggressive price cuts has eaten into profits

Tesla sign on building located on River City Drive in Jacksonville, Florida.

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Tesla (TSLA) shares dropped as much as 4.5% in after-hours trading after the company reported profits fell in the first quarter, with a series of price cuts taking a toll on margins.

Key Takeaways

  • Tesla reported revenue of $23.3 billion for the first quarter.
  • Net income fell 24% from the same quarter a year ago, as a series of aggressive price cuts took a toll on margins.
  • Shares in the automaker were lower as investors questioned its lofty valuation.

The Austin, Texas-based automaker announced first-quarter gross margins of 19.3%, the lowest level since 2020 and well below expectations. Estimates compiled by Bloomberg projected margins would come in at 23%, already a more than 600 basis-point drop from last year.

Tesla's profitability was the key focus of this earnings release after record deliveries in the first quarter. The company reported first-quarter revenue of $23.3 billion, up 24% from a year ago but missing analysts' expectations of $23.8 billion. Adjusted earnings per share came in at $0.85 as analysts had expected.

The latest earnings report could call into question Tesla's valuation, which has come down from its peak but is still very high compared to its industry peers. Tesla has an Enterprise Value (EV)/Sales ratio of 6.93 while the industry average is 1.26.

Wedbush Securities analyst Dan Ives, who has a $225 price target on Tesla, said ahead of the earnings that margins "in the teens" would likely spell the end of Tesla's price cut strategy.

Nonetheless, some analysts are optimistic. Ben Kallo of Baird, writing in a pre-earnings research note, said Tesla "will be able to maintain industry leading operating margins and is in the best position among auto peers to weather economic headwinds."

Tesla cut prices Tuesday for a sixth time this year, turning up the heat on competitors in the increasingly crowded EV market. French automaker Renault said on Monday that it's reviewing its EV pricing policy worldwide in an attempt to remain competitive.

"We will analyze country by country, market by market, which level of competitiveness we need to have to stay in the game," CEO Fabrice Cambolive said.

Tesla's stock price was 4.5% lower in after-hours trading, adding to a 2% dip on Wednesday.

Article Sources
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  1. Bloomberg. "Tesla's Bold Price Cuts Put Lofty Valuation to Test."

  2. Tesla. "2023 Q1 Tesla Quarterly Update."

  3. YCharts. "Tesla, Inc. (TSLA) Valuation."

  4. CNBC. "Moment of Truth for Tesla."

  5. Reuters. "Renault Reviewing Prices Worldwide."

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