Tesla profits fall a quarter after vehicle price cuts

Tesla reported a drop in first-quarter profit as price cuts at Elon Musk’s electric vehicle company boosted demand but hit profit margins.

Profits reached $2.5 billion, down 24% from the same period a year earlier on revenue of $23.3 billion, up 24%.

Stocks fell on the results, which were in line with Wall Street expectations for earnings per share but showed a lower-than-expected profit margin.

Faced with increased EV competition from other automakers, Tesla launched a series of price cuts in 2023, most recently in the last 24 hours on some models in the United States.

The company said on Wednesday that its profit margins had been cut to “a manageable rate” as it signaled a “unique opportunity for Tesla” and signaled more price cuts to come.

Tesla has argued that its early lead in the EV market makes it “a cost leader” as rivals rise.

In a conference call with analysts, Musk described the price cuts as related to macroeconomic factors and said the intent was to sell more cars, even at lower profit margins.

Musk pointed to the chain of the Federal Reserve of interest rate increases as the de facto price rises, adding that concerns about a recession and job losses mean “people will generally put off a big purchase like a new car.”

But as a result of the price cuts, Tesla’s operating margin fell to 11.4 percent from 16 percent in the previous quarter.

Musk and other Tesla executives were repeatedly asked on the conference call about their prospects for profit margins. But they avoided setting a target, saying it partly depends on factors outside their control, such as the price of key raw materials.

Investors who are bullish on Tesla’s strategy see the price cuts as a way to increase its market share at a time when rivals are also ramping up production amid cost pressures.

But skeptics have said the pricing strategy raises questions about Tesla’s long-term profitability, undermining the company’s supposed uniqueness and suggesting it should be priced like other automakers on Wall Street.

Tesla’s price cuts have put the company on a “razor’s edge between maintaining its brand cachet while trying to grow volume,” said Jessica Caldwell, an analyst at Edmunds.

“Buyers have previously expressed that they were drawn to Tesla because they felt connected to Elon Musk’s larger-than-life personality and mission and wanted to partner with a forward-thinking, anti-establishment brand,” Caldwell said.

“As Tesla continues to increase volume, it will further align with the standards expected of the mainstream car company it has become, as opposed to the luxury niche brand it used to be.”

In its press release, Tesla said newer plants in Texas and Germany are ramping up. He also said factory tooling was on the right track for Tesla’s “Cybertruck,” an unorthodox model that has generated fanfare.

Chief Financial Officer Zach Kirkhorn said there was an improvement in logistics costs and some commodities such as lithium. He predicted that commodity costs across the board would moderate in the second half of 2023.

Currently ranked the world’s second-richest person behind LVMH CEO Bernard Arnault, Musk has increasingly extended his efforts beyond the auto sector.

In addition to heading Tesla and Twitter, Musk recently filed documents to establish Nevada-based artificial intelligence corporation X.AI, according to trade documents.

Musk is also the founder of SpaceX, which scheduled for Thursday the first test flight of Starship, a company “designed to send astronauts to the Moon, Mars and beyond,” according to its website.

As Musk’s profile has risen, he has become a much more polarizing figure in American society.

The proportion of Americans who view Musk favorably rose to 42 percent, up from 34 percent three years ago, according to YouGov survey data. But the share of negative reviews has also risen from 18 to 33 percent, according to the data.

The shares fell 5.8 percent to $170.10 in after-hours trading.