EV (Electric Vehicle) giant Tesla’s (NASDAQ:TSLA) Q1 earnings came in-line with the Street’s expectations. It reported adjusted earnings of $0.85 a share, which met analysts’ estimates according to the data compiled by Refinitiv. However, TSLA stock fell over 6% in the after-hours trade. The company’s stance to sacrifice its industry-leading margins in order to drive demand and increase its market share didn’t sit well with the investors.
Tesla announced a series of price cuts to spur demand. This has weighed on the company’s margins. Its operating margin continued to decline for the second consecutive quarter. Meanwhile, the Q1 operating margin fell by approximately 779 basis points year-over-year to 11.4%.
While Tesla’s margins have shrunk, the company’s margins still remain the best in the industry, as highlighted by Tesla CEO Elon Musk.
Musk added that the company is pushing for higher volumes versus a lower volume and higher margin. This indicates that the company’s margins and profitability could continue to trend lower in the near future.
As for the long term, Musk expects the vehicles to generate significant profit via autonomy, service, and supercharging.
Post-Q1 results, Mizuho Securities analyst Vijay Rakesh said that Tesla’s focus on volume growth would significantly boost demand. Rakesh added that TSLA’s aggressive price cuts “could deliver significant demand elasticity for TSLA and market share gains in the US market.” The analyst recommends a Buy on TSLA stock.
However, he trimmed his earnings estimates for 2023 and 2024 and lowered his price target to $230 from $250.
While Tesla’s margins are likely to stay under pressure, let’s check what the Street recommends for TSLA stock.
Is TSLA Stock a Buy, Sell, or Hold?
Analysts are cautiously optimistic about TSLA stock. It sports a Moderate Buy consensus rating on TipRanks, reflecting 18 Buy, 10 Hold, and three Sell recommendations. TSLA stock is up over 46% year-to-date. Meanwhile, analysts’ average price target of $219.15 implies a further upside potential of 21.35% from current levels.
Bottom Line
Tesla’s focus on pushing volumes at the expense of margins will likely result in lower profitability in the coming quarters. However, the move is expected to further solidify its industry leadership and drive demand. Meanwhile, the company expects to maintain its industry-leading margins despite price cuts and will likely benefit from its efforts to reduce costs and improve efficiency.
