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Sunday, December 3, 2023

Tesla’s Margins Under Pressure: What to Expect in Q3 & Beyond

BusinessTechnologyTesla's Margins Under Pressure: What to Expect in Q3 & Beyond

Tesla (TSLA.O) has been a trailblazer in the electric vehicle (EV) industry, but as we move into the latter part of 2023, the company is facing growing challenges that could have a significant impact on its profit margins. The third quarter of the year has already seen some margin erosion, and experts predict that the last three months of 2023 may bring even more financial pressure for the electric automaker.

The primary driver behind this margin squeeze is Tesla’s strategic decision to prioritize sales and market share over profitability. In an environment of high-interest rates and amid intensifying competition, notably from Chinese automakers like BYD (002594.SZ) and (1211.HK), Tesla has chosen to sacrifice some of its margins. This has left investors concerned about the potential need for further price cuts to stimulate demand.

“I don’t think the price cuts are over, mainly for the reason that demand is still weak,” stated Thomas Martin, a senior portfolio manager at Globalt Investments, one of Tesla’s shareholders. This sentiment reflects the broader unease within the investment community regarding Tesla’s ability to maintain its lofty valuation while navigating increasingly challenging market conditions.

As we delve into Tesla’s upcoming earnings report, here are the top five factors that investors should keep a close eye on:

1. Deliveries Target:

One of the key questions investors will be looking to answer is how CEO Elon Musk plans to achieve the ambitious goal of delivering a record 476,000 vehicles in the fourth quarter, all in an effort to meet the company’s annual target of 1.8 million units. To boost sales and maintain market dominance, Tesla initiated price cuts in October. These reductions affected popular models such as the Model 3 compact sedan and the Model Y SUV. In the following month, the company further lowered prices on its premium S and X models. Additionally, Tesla unveiled a refreshed Model 3 variant designed to provide an extended driving range. However, it’s important to note that Tesla has yet to begin deliveries of this new Model 3 in both China and Europe, and there’s still no timeline for its launch in the United States.

2. Margins:

Tesla’s strategy of engaging in a price war to maintain or expand its market share has taken a toll on its margins. In the July-September period, Tesla implemented price cuts exceeding 6% across various models, putting considerable pressure on the company’s profitability. According to a poll of nine analysts conducted by Visible Alpha, Tesla’s margins likely dipped to a four-year low of 18.1%, excluding regulatory credits. The trend is expected to persist into the fourth quarter, with some experts predicting margins could fall below 15%. Colin Langan, an analyst at Wells Fargo, explained, “We are factoring in help from the recent decline in lithium prices. However, that likely falls short of offsetting the price cuts.” It remains to be seen whether these price reductions will ultimately translate into increased sales and market share gains substantial enough to justify the margin sacrifice.

3. Cybertruck:

Tesla’s highly anticipated Cybertruck launch event was originally scheduled for September but has been postponed to the end of the year. Elon Musk cited the design complexity of the truck as the primary reason for the delay. Originally projected to have a starting price below $40,000 in 2019, the Cybertruck’s pricing now faces upward pressure due to rising EV prices across the industry. Gary Black, managing partner of The Future Fund, which owns Tesla stock, estimated that the single-motor variant could be priced at around $49,900, the dual-motor at $59,900, and the tri-motor at approximately $79,900, slightly higher than the Model Y. The success and pricing strategy of the Cybertruck will be closely monitored, as it could significantly impact Tesla’s revenue and profitability.

4. Full-Self Driving:

Elon Musk has long been a proponent of Tesla’s full-self driving technology as a key driver of the company’s value. However, Tesla has faced challenges in meeting its targets for achieving full self-driving capability, largely due to regulatory scrutiny and safety concerns surrounding the technology. In August, Tesla slashed the price of its full-self driving package by 20%, a move that raised questions about the company’s ability to monetize this technology. Investors will be eager to hear more about Tesla’s plans for full-self driving and whether further price cuts are on the horizon.

Tesla’s announcement in March regarding a new factory in Mexico’s northern state of Nuevo Leon has generated considerable interest. However, key details about the facility, including potential capital outlay, have been eagerly awaited. A senior Mexican government official recently indicated that the final permits for the factory could be ready in the coming weeks, and local authorities have commenced infrastructure work as per Tesla’s requests. The progress and cost implications of this project will be of great interest to investors as it could significantly impact Tesla’s production capacity and its presence in the Latin American market.

5. Mexico Factory:

Tesla’s margin pressures are becoming more pronounced as the company faces a tough competitive landscape and economic challenges. Its strategy of sacrificing margins to boost sales and market share will be a key focus in the upcoming earnings report. Additionally, factors like the Cybertruck’s pricing and the progress of full-self driving technology will shape Tesla’s prospects in the coming quarters. Investors will also closely watch developments related to the new factory in Mexico, which could play a pivotal role in the company’s growth strategy.

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