Tesla Earnings Likely Dropped 20% On Price Cuts Despite Record Deliveries

Tesla (TSLA), the largest electric carmaker in the world, is likely to report a 20% decline in first quarter earnings, despite delivering a record number of cars as aggressive price cuts eat into its bottom line.

The Austin, Texas-based electric vehicle giant is expected to show earnings per share of $0.86, a 20% decline versus $1.07 in the same period last year, according to estimates from Visible Alpha. The carmaker’s revenues are expected at $23.8 billion, a 22% jump compared to the first quarter of 2022.

Tesla, which set a record for deliveries with 422,875 vehicles in the first quarter, will report its earnings on Wednesday, April 19.

Elon Musk’s automaker followed up the delivery boost with another round of price cuts last week for the more expensive Model S and Model X vehicles. The company moved again on Friday with a fifth round of cuts that saw prices reduced in Europe, Israel, and Singapore.

The company’s sales have been boosted by the economic reopening in China while lithium prices have also plunged more than 57% year-to-date and the company is obviously looking to make its cars more accessible in an increasingly competitive market.

Tesla Picks Market Share Over Profit

For analysts and investors, this is a pivotal earnings release for Tesla because they will get a first look at how the aggressive price cuts are affecting the bottom line. Tesla is likely to cement its place as the top electric vehicle (EV) automaker, but its stock price could suffer in the year ahead as the strategy starts to drag on earnings. 

Recent rule changes on EV tax credits announced by the Treasury and the Internal Revenue Service will add another headwind in the coming quarters. Tesla buyers were treated to an additional $7,500 discount on some of its models due to credits passed in the Inflation Reduction Act of 2022. The eligibility rules have now been tightened according to manufacturing and battery parts, which Tesla said would affect the Model 3.

Tesla shares have risen more than 50% year-to-date after a nearly 68% decline in 2022. In comparison, the S&P Consumer Discretionary sector is up 13.67% year-to-date. The company is currently valued at a market capitalization of about $570 billion, with a price/earnings ratio of 51x earnings.

Tesla’s Earnings History

Tesla has beaten analyst estimates on EPS in its last seven quarters, according to data from YCharts.

Over the two years, the company’s operating income has grown more than six times over two years to $3.9 billion in the fourth quarter of last year, compared to the same period in 2020.

That is likely to be seen as the peak over the medium term as the price-cut strategy dents the profitability of each vehicle.

The Key Metric

The key metric for Tesla in the upcoming earnings release is likely to be the company’s margins. Tesla has a gross profit margin of 25.6%, which is higher than other competitors such as Ford (F) and General Motors (GM), according to YCharts.

The company also outperforms peers on EBIT margins with 17.08%. That gives Tesla some room for its price cuts to eat into profit margins but still see it come out ahead of the EV competition.

That outlook is shared by Baird research analyst Ben Kallo. MarketWatch reported Kallo said despite price cuts, Tesla “will be able to maintain industry-leading operating margins and is in the best position among auto peers to weather economic headwinds.”