Tesla’s profit margins plummeted last quarter after the electric-car maker aggressively cut prices.
In a conference call, CEO Elon Musk said he will continue with this strategy.
Musk could sacrifice near-term profits to increase Tesla’s market share.
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Tesla disappointed its shareholders on April 19 when the company revealed how its aggressive price cuts are affecting the business.
The automaker began slashing prices on the Model Y SUV and Model 3 sedan in January — and the recent earnings report showed that profit margins fell dramatically in the past quarter.
Speaking to investors over the phone, CEO Elon Musk hinted that he will continue this strategy to lure customers away from traditional automakers and EV competitors.
However, analysts have warned that Tesla may have to sacrifice its near-term financial results to increase its market share — and it may be too early to say whether the price war will help or backfire.
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Disappointing gains
Tesla has already cut prices six times this year.
The entry-level Model 3 now costs the equivalent of less than 37,000 euros, compared to the equivalent of around 57,000 euros at the beginning of the year. The Model S and Model X are also 20 percent cheaper than they were in early 2023, even after Tesla hiked prices in the US on Thursday.
But those cuts have eaten away at Tesla’s profit margins. In Wednesday’s earnings report, the company said its profit fell 24 percent year-on-year to just over $2.5 billion.
Shares were down almost 10 percent by the close on Thursday, taking the company’s value down $56 billion — a number that’s more than Ford’s market cap.
Wall Street had been expecting margins to fall, but traders were probably surprised by how sharp the drop was, according to Morningstar equities analyst Seth Goldstein.
“The magnitude of the margin pulldown was below what I was expecting and also below what the market was expecting,” he told Business Insider, “so we saw the sell-off in the stock, it was a reaction to that.”
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Tesla wants market share
In Wednesday’s conference call, Musk told investors that the company will prioritize revenue growth over earnings in a weak economy.
“We believe that higher volume and a larger fleet is the right choice here, as opposed to lower volume and higher margin,” he said.
Musk’s willingness to pursue a strategy that impacts profits suggests he’s targeting a market occupied by traditional automakers. Ford was one of the only traditional automakers to respond to Tesla’s price cuts by lowering the price of its Mustang Mach-E in January, but the company hasn’t made any further price cuts.
Although price competition is not uncommon in the auto industry, automakers could struggle to keep up with Tesla’s price cuts without hurting their own profit margins.
“I think incumbent automakers are now in a quandary – do they cut prices or sell fewer EVs at a higher price to protect their profits? You are faced with a choice of either lowering prices or squeezing profits even more. That’s an interesting scenario to see how they react,” Goldstein said.
Musk’s cost-cutting could boost margins over the long term
Tesla’s profit margins fell last quarter as price cuts eroded revenue, but margins could recover if Musk manages to cut costs.
Musk and other executives said in a March 1 presentation that Tesla will introduce innovative manufacturing techniques and use smaller factories. The electric car maker is also rumored to be developing a cheaper model that will cost around $25,000.
“They pass those cost savings that they make on to the consumer, whereas in the past I think that was just a margin that went on the automaker’s books,” said Caspar Rawles of Benchmark Mineral Intelligence, a pricing analytics agency , told Business Insider.
“But Elon has indicated that they have a mandate to maintain a low selling price for these vehicles, which has obviously been extremely difficult over the past few years with all the supply chain issues they’ve been facing,” he added.
By slashing prices and aggressively cutting costs, Tesla trades short-term profits in exchange for increasing its market share over the long term.
“Right now, it looks like the company’s competitive position takes precedence over protecting profitability,” said Russ Mold, investment director at AJ Bell on Thursday. “Only time will tell if this is the right move. “
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