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The EV company slashed prices on its Model 3 and Model Y vehicles five times since January in an effort to boost demand. Now, its profit margins are taking a hit.
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Illustration: Alex Castro / The Verge
Tesla published its first quarter earnings report in which the company said it earned $2.9 billion in net income on $23.3 billion in revenue. That represents a 24 percent increase year over year compared to $18.7 billion in revenue in Q1 2022.
Most importantly, the company’s gross margins fell to 19.3 percent, a sign that its rampant price cutting was starting to take a toll on its bottom line.
In a letter to shareholders, the company said:
Although we implemented price reductions on many vehicle models across regions in the first quarter, our operating margins reduced at a manageable rate. We expect ongoing cost reduction of our vehicles, including improved production efficiency at our newest factories and lower logistics costs, and remain focused on operating leverage as we scale.
The earnings come on the heels of a somewhat disappointing delivery and production report in which the company said it delivered 422,875 of its EVs to customers in the first quarter of 2023, including 412,180 Model 3 and Y vehicles and 10,695 Model S and X vehicles. Wall Street was expecting Tesla to report deliveries of around 432,000 vehicles for the quarter, according to CNBC.
Tesla’s first quarter has been marked by a series of price fluctuations in the US, Europe, and China, as the company has dealt with rising competition from rival automakers and flagging demand for its own vehicles. Most recently, the company cut the price of its Model 3 and Model Y vehicles in the US for the second time in a month, reducing the starting price of Tesla’s most affordable EV below $40,000. The company has slashed prices five times since January.
Tesla’s moves have sparked what some have called an EV price war, presenting a challenge for rivals like Ford, GM, Volkswagen, and others in their quest to unseat the company from the top of the EV sales chart.
The first quarter also saw Tesla’s much-hyped Investor Day event at which CEO Elon Musk unveiled the company’s third “Master Plan.” The company provided a deep dive into its energy storage business, supply chain practices, capital expenditures, and charging infrastructure investments — but some investors came away disappointed by the lack of new product information, especially with regard to a new low-cost electric model.
In the run-up to the earnings report, analysts were speculating how Tesla’s price cuts will affect its profit margins, which historically have been among the best in the industry.
“We continue to strongly believe that aggressive price cuts by Tesla was a smart ‘rip the band-aid off moment’ for Musk & Co. to defend its EV turf and put an iron fence around its consumer installed base,” said Dan Ives, an analyst at Wedbush, in a research note last week. “That said, price cuts come at a price and this tug of war between volumes and margins is now the big debate on the Street heading into earnings and the rest of [fiscal year 2023].”
Tesla’s chief financial officer promised in January that Tesla would not go below margins of 20 percent and an average selling price of $47,000 across models. But further price cuts are sure to put pressure on that promise.
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