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Earnings preview: Tesla’s profit margin is at stake

Tesla

Tesla will report its first-quarter earnings after the US market close on 20 July (APAC time). Tesla’s shares were one of the best performers on Wall Street, up more than 30% in the first half of the year. GM and Ford’s adaption to its battery stations, a record quarterly delivery number, and the broad tech rally all contributed to its success. But still, Tesla’s profit margin remains focused as its price cuts may continue to weigh on revenue.

Q1 review

Tesla delivered 440,808 electric vehicles in the first quarter, up 44% year on year. The earnings per share was $0.85, in line with expectations. The revenue was recorded at $23.33 billion, beating analyst estimates. However, Tesla’s profit margin slumped to 19.3% from 29.1% a year ago as its net income significantly declined due to price cuts. 

Business growing focus

While the number of car delivery remains focused, Tesla’s profit margin hangs on balance for its market valuation. In the second quarter, Tesla’s delivery number hit a new record high of 466,140 electric cars, up 83% year on year, accelerating from a 44% increase in the prior quarter. Tesla’s shares price jumped 6.9% on the day when it reported the number. Hence, this may have been priced in. Now the focus will be on its net income.

China’s EV deliveries account for at least half of Tesla’s sales globally. However, Tesla faces fierce competition with local car makers, such as BYD, NIO, and XPeng. Tesla entered a price war with local competitors from January to May before the automakers signed an agreement to stop “abnormal pricing” in early July. According to Bloomberg, Tesla slashed prices by 6.6% on average from December 2022 to May 2023. Some models were 12% cheaper in early March than they were in 2022. On the other hand, Tesla’s car delivery from the Shanghai plant jumped about 20% in June, thanks to the intense price cuts, though some prices were revised up a little afterward. Hence, Tesla has to sell enough cars to compensate for its price cuts to make up the profit margin. Notably, Tesla’s free cash flow slumped to $441 million in the first quarter from 2,228 million a year ago, or an 80% decline, suggesting Tesla’s free cash flow may drop to negative if the car sales revenue cannot make up for its costs. 

Source: Tesla

Tesla’s market share was being challenged not only in China but also in Europe. Chinese car brands accounted for less than 10% of the EVs sold in Europe in 2022, and the number may climb to 15% by 2025, according to KPMG. Tesla accounted for more than 2.4% of the total car market and about 15% of the EV markets in Europe.

Q2 Earnings Forecasts by Bloomberg

Earnings Per Share: 0.71, +9% annually

Revenue: $24.48 billion, +45%

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