Tesla, led by Elon Musk, has been cutting prices multiple times since last year in an effort to drive sales and remain competitive. However, this has resulted in a lower total gross profit margin for the first quarter of 2022, which missed market estimates. The company reported a total gross profit margin of 19.3%, compared to the expected 22.4%. This is the lowest margin since the fourth quarter of 2020.
A higher gross margin means that a company retains more capital, which can be used to pay for other costs or service its debt. Tesla’s shares fell by almost 4% in trading after the bell. The electric-vehicle maker has cut prices in the United States, China, and other markets since late last year. Musk has said that Tesla could sacrifice its industry-leading margins to drive volume growth during a recession.
However, analysts believe that Tesla may need to cut prices further due to ongoing price wars, especially in China. This is necessary to prop up demand for its aging lineup of models even as its new factories in Berlin and Texas churn out cars. In the US, where federal subsidies have recently boosted sales only modestly, Tesla has cut car prices six times this year, which has dragged its automotive gross margin. It has also expanded price cuts in Singapore, Israel, and Europe.
In January, finance chief Zachary Kirkhorn promised that Tesla would not go below margins of 20% and an average selling price of $47,000 across models. Tesla reiterated on Wednesday that it expects to achieve deliveries of approximately 1.8 million vehicles this year. The company has previously said that logistics issues have caused it to deliver far fewer cars than it makes. In the first quarter, it delivered about 18,000 fewer cars than it made.
The company reported first-quarter revenue of $23.33bn, which was slightly higher than the consensus estimate of $23.21bn, according to 22 analysts polled by Refinitiv. However, the net profit for the quarter was $2.5bn, down from $3.32bn a year earlier.
Canaccord Genuity analyst George Gianarikas said in a broker note ahead of earnings that “We also suspect Tesla’s decision to consistently cut prices will prove a headache to competitors. While Tesla’s industry-leading margins will likely be sacrificed in the near term (as articulated on the company’s 4Q22 earnings call), many EV competitors are struggling to turn a profit.”
Tesla’s sixth price cut on Tuesday, ahead of results, knocked down its shares and those of its EV rivals Lucid and Rivian. In post-market trading on Wednesday, shares in these companies fell slightly.