Tesla Earnings Meet Expectations For Q1 But Gross Profits Slip As Carmaker Slashed Prices

Key takeaways

• Tesla’s gross profit margin was down 19.3% while net income fell 24%
• Wall Street responded with a 9.8% share price drop for Tesla
• The carmaker slashed the prices of its EVs in a bid to maintain market share, a move which had boosted the stock earlier this year

There’s no beating about the bush: Tesla’s earnings and profit margins are down by quite some margin, resulting in a bruising week for the Tesla share price and with investors doubtful about CEO Elon Musk’s price war strategy.

It’s not been Elon’s best week after his SpaceX rocket ship also blew up on launch, with a total of $13 billion wiped off his net worth. And Wall Street isn’t exactly wanting to hear that the world’s most valuable carmaker is finding the economic climate difficult.

We’ve got the latest on Tesla’s Q1 earnings, what Wall Street’s reaction was and how the wider car sector is shaping up for 2023.

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What happened on Tesla’s earnings call?

Tesla’s first-quarter earnings call was a mixed bag but all eyes were on the gross profit margin, which plunged 19.3%. The net income fell 24% from the same period last year from $3.32 billion to $2.51 billion.

Q1 earnings came in exactly as predicted, 85 cents earnings per share, while revenue came in at $23.33 billion, beating analyst expectations of $23.21 billion. While total revenue rose 24%, the revenue from automotive regulatory credits was down to $521 million from highs of $679 million last year.

Musk blamed a lot of factors like logistics, material costs and higher interest rates for the bad numbers. The company, which has driven the widespread adoption of EVs, slashed the cost of its most popular models earlier this year which has caused the dive in top-line figures. Despite the flashy PR stunt, the number of vehicles delivered in Q1 only rose 4% from 2022 Q4.

Musk defended the move on the call, saying “higher volumes and a larger fleet is the right choice here” and that Tesla expects its vehicles to benefit from autonomous vehicles. “We’re the only ones making cars that technically could sell for zero profits now and yield tremendous profits in future through autonomy,” Musk insisted. It’s a bold play that didn’t go down well with Wall Street.

What was the market reaction?

Wall Street has shown they’re unconvinced with companies talking about futuristic tech when a potential recession is on the horizon, evidenced by Meta’s pivot away from the metaverse.

It responded accordingly to Musk’s ‘robo-taxis’ talk: Tesla’s share price closed 9.8% down by the end of Wednesday and is down 11% overall this week. On Friday the stock recovered 1% during early trading hours.

Tesla’s earnings also caused contagion to other carmakers: Ford’s share price slipped to 2.9%, while General Motors fell by 3%. Even overseas makers like Volkswagen and Toyota saw shares drop by 2.4% and 1.1% respectively. The S&P 500 fell 0.6% while the Nasdaq Composite dropped 0.8%.

Wall Street is keeping a hawkish eye on this earnings season as fears of a recession continue to loom over the global economy. As higher interest rates and inflation persist, Tesla’s earnings miss is a warning that the rest of the car industry may be following suit.

The wider car market

Tesla is already facing concerns about falling demand for its vehicles as high inflation squeezes household incomes. With Musk’s commitment to slashing costs for consumers in a bid to maintain market share, this is a long-term play at a time where short-term wins are being rewarded by investors.

Nonetheless, Elon has a point: Tesla is losing its market share. S&P Global Mobility data revealed Tesla’s market share has slipped from just over 70% in 2021 to 63.5% in 2022. As General Motors released its Chevrolet Bolt model for $26,500 and more luxury models are now on the market from the likes of BMW, Audi and Mercedes Benz, Tesla faces some serious competition.

Those issues aren’t just limited to the US. In China where EV sales have surged in recent years due to government-backed subsidies, Chinese carmaker BYD saw an uptick in its market share once Tesla announced its price cut. It sold five times as many units as Tesla did in the country in the first two months of the year. In 2022, Chinese companies accounted for nearly half of total passenger vehicle sales.

It’s clear Tesla is feeling the pressure and has employed some creative thinking to position the business for the long haul. We’ll have to wait and see what General Motors and Ford’s earnings are like to see whether Tesla’s story about the economy is true or if the pricing strategy has been a bad call.

The bottom line

Musk’s talk of autonomous vehicles sounds like a desperate attempt at putting a positive spin on an earnings report he knew looked bad. But this is a long-term thinking and visionary man who some investors like to bet on for this reason alone.

Tesla also has some lofty expectations placed on it by investors. It’s worth noting it still beat revenue expectations and matched EPS forecasts, making it possible the share slide was a little bit of an overreaction.

As the economic climate bites and new car sales slow down, it’s likely to be a trying time for the industry. Musk’s market share gamble could either work out phenomenally well or result in a downbeat rest of the year for Tesla stock.

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