Tesla sinks as investors brace for new hits to profitability

Tesla fell in late trading after profitability shrank in the second quarter, and the carmaker warned hits to margins are likely to keep coming.

Elon Musk said the company probably will keep lowering the prices of its electric vehicles if interest rates continue to rise. Months of markdowns have already taken a toll on Tesla’s gross margin, which fell to 18.2 per cent in the second quarter, a three-year low.

Tesla is also pouring money into other investments, including its newest model, the Cybertruck, and Dojo, an in-house supercomputer that Musk said the company will spend at least $1 billion (€892 million) on by the end of next year. And while Tesla remains on track to produce around 1.8 million vehicles in 2023, output will dip this quarter due to factory upgrades.

The CEO characterised the smaller profits as speed bumps in a broader growth story, and claimed Tesla could one day be 10 times its current size. Investors still reacted negatively, with the stock falling 4 per cent in New York, after more than doubling so far this year.

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“It does make sense to sacrifice margins in favour of making more vehicles because we think in the not-too-distant future they will have a dramatic valuation increase,” Musk said.

Tesla’s strategy of cutting prices to increase sales volume – a reaction to stretched household budgets and new competitors – has been working. The company beat both earnings and revenue expectations in the second quarter and had already announced record vehicle deliveries for the period.

“Given the stock’s meteoric run-up so far in ’23, investor expectations were clearly high heading into the release,” Garrett Nelson of CFRA Research said in a note to clients.

The carmaker’s profit, excluding some items, came to 91 cents a share, more than the 81 cents that analysts estimated. Revenue rose 47 per cent to $24.9 billion, better than consensus expectations for $24.5 billion.

The company didn’t break out its automotive margin, a closely watched gauge of Tesla’s profitability, which was more than 30 per cent at the start of last year. Barclays analyst Dan Levy calculated the margin to be 18.1 per cent for the quarter, excluding regulatory credits.

In January, Tesla chief financial officer Zachary Kirkhorn said he was targeting a 20 per cent auto margin for the year, excluding regulatory credits. That’s been tough to maintain amid a broader slowdown in EV buying and ballooning inventories, and Kirkhorn walked back the forecast in April.

Adding to the Austin-based carmaker’s challenges is its ever-larger inventory of cars. The company said it now has 16 days’ worth of supply globally, up from 15 days last quarter and four days a year ago.

That’s after months of markdowns on Tesla’s best-selling models, and perks including free charging that the carmaker has offered.

Musk didn’t provide any finer details on the third-quarter production slowdown, calling it a result of “summer shutdowns.” He said earlier this year that the company had “a shot” at making 2 million cars.

While analysts have said new models like the Cybertruck could help Tesla maintain its sales-growth rate, the long-awaited truck won’t be available in large volumes until next year. The first Cybertruck rolled off the line in Tesla’s Austin factory just recently, the company said over the weekend.

Tesla clarified the Cybertrucks being built now – roughly two years late – are actually “release candidates” and not for sale. The company didn’t offer any updated information about pricing and said it will start deliveries later this year.

Musk also touted Tesla’s driver-assistance software, which the company may make available to other automakers. The CEO said Tesla is in early discussions about potentially licensing its system to a major manufacturer he didn’t name. – Bloomberg