Cheaper Tesla is hurting earnings, but Musk still wants to cut prices

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

Tesla disappointed its shareholders on April 19 when she revealed how severe price cuts affected her business.

The automaker began lowering the price of its Model Y SUV and Model 3 sedan in January — and its price Latest earnings report It showed that profit margins have decreased significantly over the past quarter.

On a call with investors, CEO Elon Musk hinted that he would move forward with the strategy in an effort to lure customers away from traditional automakers and electric vehicle competitors.

But analysts have warned that Tesla may have to sacrifice its short-term financials to boost market share — and it may be too early to say whether the price war will help or backfire.

Disappointing earnings

Tesla has cut 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 X are also 20% cheaper than they were at the start of 2023, even after that. Tesla raised US prices Thursday.

But these cuts hit Tesla’s profit margins. In an earnings report on Wednesday, the company revealed that its earnings fell 24% year-over-year to just over $2.5 billion.

Shares were down nearly 10% at the market close Thursday, wiping out a $56 billion valuation — a figure higher than Ford market cap.

Wall Street expected margins to drop, but traders will likely be surprised by how big the drop will be, according to Morningstar equity analyst Seth Goldstein.

“The extent of the margin drop was less than what I expected and what the market was expecting as well,” he told Insider. “That’s why we saw stocks sold, it was a reaction to that.”

Tesla wants market share

On an earnings call Wednesday, Musk told investors that the company will put sales growth before profit in a weak economy.

“We’ve taken the view 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-making strategy suggests he may be eyeing a market occupied by older automakers. Ford was one of the only traditional automakers to respond to Tesla’s cuts in January, lowering the price of the Mustang Mach-E, but has not made further cuts.

While price competition is not uncommon in the auto industry, car companies may struggle to match the size of Tesla’s cuts without hurting their profit margins.

“I think the legacy automakers are left scrambling for now — are they cutting prices, or are they selling fewer EVs at a higher price to keep profits? They are faced with a choice between cutting prices or hurting earnings more. An interesting scenario in terms of how they respond,” he said. Goldstein.

Lowering Musk’s costs could boost margins in the long term

Tesla’s margins slumped last quarter because price cuts eroded revenue, but margins could rebound if Musk can cut costs.

Musk and other executives said Tesla will introduce innovative manufacturing technologies and use smaller factories in a presentation on March 1. The EV maker is also rumored to be developing a cheaper model, which is expected to cost as well. About $25,000.

“They pass on these cost savings that they achieve to the consumer, whereas I think historically that would be just a margin that could go into the automaker’s books,” Caspar Rawles of Benchmark Mineral Intelligence, a pricing reporting agency, previously told Insider.

“But Elon has hinted that they have a mandate to try to maintain a low sticker price for these vehicles, which has obviously been a huge challenge over the past couple of years with all the supply chain problems they’ve had,” he added.

By aggressively slashing prices and cutting costs, Tesla is choosing to suffer short-term profit pain in return for increasing market share in the long term — but it will be some time before Musk can determine whether this is the right approach.

“Currently, the company’s competitive position appears to take priority over protecting profitability,” said AJ Bell’s Chief Investment Officer. Ross Mold said Thursday. “Only time will tell if this is the right move.”