Tesla Inc has been cutting prices this year to boost sales of its older EVs, but it has also eroded its industry-leading profit margins. The volume-over-profit approach will be a key focus of its first-quarter earnings report on Wednesday.
According to Cox Automotive, the EV maker sold 161,630 vehicles in the US in the January-March period, representing 25 percent growth from a year earlier, but well below CEO Elon Musk’s 50 percent global growth target .
Tesla didn’t break out US sales but recorded global deliveries of 422,478 in the first quarter, up 4.2 percent from the previous quarter. That growth suggests that price cuts were necessary to sustain growth amid rising EV competition.
At the same time, according to a Visible Alpha survey of market analysts, Tesla expects an auto gross margin of 23 percent after the market closes on Wednesday. A year ago, Tesla reported 33 percent gross margin, Reuters said.
The profit shortfall was expected after Tesla cut prices of some versions of its best-selling Model Y crossover in the US by up to 20 percent. Tesla has also cut prices in Asia, Europe and the Middle East this year to boost sales.
In January, Tesla CFO Zachary Kirkhorn estimated gross margin would fall no lower than 20 percent, which is still very healthy by industry standards. Tesla’s share price had risen more than 70 percent this year as of Monday’s close.
Wedbush analyst Daniel Ives, who is bullish on Tesla, said in a Twitter post on Sunday that the main focus for investors going into earnings is “the margin structure of the business model.”
“An auto gross margin north of 20 percent is significant,” he said.
Ives said Tesla has already beat global sales expectations with first-quarter deliveries, proving that the price cut was a smart move by the automaker to protect its EV share.
Morgan Stanley said in a research note Monday that it expects “a good” first-quarter report from Tesla, but warned that maintaining a minimum 20 percent gross margin could be challenging if additional costs for growth deficiency is necessary.
“Our working assumption is that Tesla will continue its price-cutting campaign,” said Morgan Stanley analyst Adam Jonas. He said the firm has heard from investors who predict first-quarter gross margins of 17 percent to above 24 percent, including software sales and lower lithium prices that could boost profitability.
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