Will price cuts bite into margins?

After a rip-roaring 50% return year to date, Tesla (TSLA) investors will be keen to keep the good times rolling as the electric vehicle maker reports Q1 earnings after the bell on Wednesday.

Wall Street is expecting Tesla to report $23.37 billion in top-line revenue and EPS of $0.860 on an adjusted basis. That revenue figure would represent a slight dip from the $24.32 million Tesla reported in Q4, but 24.6% higher than a year ago.

In terms of profit, Tesla is expected to report adjusted net income of $3.03 billion — a billion less than last quarter and $700 million less than a year ago. With revenue staying flat-ish and profit dipping, the effects of margin compression could be at play here.

Tesla instituted a number of price cuts in the U.S., Asia, and some European markets in Q1 of this year, most recently in the U.S. just last week. Investors will be watching how these price cuts affect gross margin figures, which last quarter came in at 23.8%, with automotive gross margin hitting 25.9% — both slightly less than quarter before.

Wall Street banks such as Evercore ISI have attempted to quantify the price cuts. “If we assume ~$2k US [price] cut ave translates to ~$1k global and then half of that is offset by cost improvements… then $500 cut to gross profit equates to ~100bps of gross margin pressure and implies 19% Q2/Q3 Auto gross margins (rough math,” the analysts said earlier this month.

Similarly, Ryan Brinkman of JPMorgan has been wary of the price cut effect on Tesla’s profitability, as well as other EV-makers.

“We have been cautious about the profit impact of Tesla’s price cuts, writing that the lower prices are negative overall for Tesla, less negative for traditional automakers such as GM and Ford (given they are now likely to lose even more money in the interim on EVs, although have other profit centers to offset such losses), and most negative of all for pure-play battery electric automakers competing with Tesla (such as Rivian), as they, too, are likely to lose more money on EVs although do not have profits elsewhere to offset these losses,” Brinkman wrote earlier in April.

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And similar to last quarter, analysts are keying in on the word “demand” as it pertains to production and backlog. In Q1 Tesla delivered around 423K vehicles and produced 440K globally; analysts at Evercore, for instance, would like to hear any indication of how Q2 deliveries are tracking, and if the order backlog is growing. Guggenheim analyst Ronald Jewsikow wrote in a note to clients that week that Tesla’s most recent U.S. price cuts indicated “slowing demand” for the EV-maker.

Looking further ahead to the post-earnings conference call, investors and analysts will be waiting to hear any progress on Cybertruck production which is slated to begin later this year, any new information on the gen 3 platform discussed at Tesla’s investor day, and more on the timeline ahead for construction of Tesla’s latest gigafactory in Mexico.

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Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.

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