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Tesla share price set to fall as margins slip more than expected

Tesla

Earlier this year the Tesla share price hit its lowest level since August 2020, as a combination of concerns over rising costs, increased competition, and the focus of its CEO Elon Musk on the business saw the shares plunge from peaks of $400 at the start of 2022 to as low as $102 at the start of this year.

We’ve seen a modest recovery since then to just shy of the 200-day SMA which has acted as a barrier to further gains for the moment.

There is no question that Tesla continues to deliver record numbers of new vehicles, and looks set to continue to deliver ever higher numbers on a quarterly basis, with the number of Tesla locations rising by 27% to 1,000, but there has been a concern in recent days that its ability to maintain its margins will hamper its ability to drive its future profits growth.

Yesterday the shares finished the day lower after the electric car company announced a further set of price cuts, the sixth such announcement this year.

Last night’s Q1 announcement saw the shares slip back further in after-hours trading as modest misses on revenues and profits, along with a sharp decline in total gross margins weighed on sentiment, making the prospect of a revisit of the March lows at $164 a possibility.

Even though Tesla once again delivered a record quarter for deliveries in Q1, with 422,875, this was only a modest increase on the 405,278 delivered in Q4.

Last night’s Q1 numbers saw that margin number fall further to 19.3%, below expectations of 21.2%, even as profits came in at $0.85c a share, and revenues came in at $23.33bn, a rise of 24% year on year, although down on Q4’s $24.3bn.

The fall to 19.3% in gross margins is a 977bp decline from the same quarter a year ago, and could well get worse after Tesla said prices could get changed further in the coming months.

Tesla blamed the reduction in margins on a number of items, including higher raw material, commodity, logistical and warranty costs. Tesla also mentioned the cost of ramping up the production of 4680 cells.

Free cash flow also fell sharply, falling to $441m a decline of 80% from the same quarter last year.

At the time of the Q4 numbers CEO Elon Musk expressed confidence that, while the aim for Tesla was to make 1.8m vehicles this year, a figure of 2m was possible.

This doesn’t look particularly likely if the numbers delivered in Q1 is any guide, which might explain why Tesla is starting to cut prices so aggressively so that it can keep its production levels up.  

Since the end of last year, Tesla has announced a range of swingeing price cuts across all of its regions and has continued to do so in recent days, which suggests that the company is now more concerned about demand than they are about margins.

This appears to be being reflected in inventory levels which rose to 15% in Q1 and up from 13% in Q4.

The best-selling car in Q1 has been the Model Y which saw 412,180 sold, while the Model S and X saw 10,695 sales, a fall of nearly 35% from a year ago.  

On the plus side, the Cybertruck is on course to start production this year.

Tesla kept its full-year production target of 1.8m vehicles unchanged.

 


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