Shares of Tesla (NASDAQ: TSLA) continued on a downward trajectory in morning trading on Thursday after the EV major’s Q1 results left investors disappointed. However, it was the company’s margins that left investors wondering about the demand for Tesla’s EVs and its pricing strategy. Tesla has been on a price-slashing spree in the U.S. as well as in international markets.
The company’s automotive gross profit margins, excluding regulatory credits, dropped to 16% in Q1 from about 21% in the fourth quarter of 2022. This is the first time that TSLA’s margins fell below 20% since the second quarter of 2020. Including leases, the company generated gross profit margins of about 19% well below analysts’ expectations of 21%.
Elon Musk, Tesla’s CEO elaborated more on its margins at its Q1 earnings call and stated that the company’s operating margins continue to be the “best in the industry” even with the price cuts. Musk added, “We’ve taken a view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin. However, we expect our vehicles, over time, will be able to generate significant profit through autonomy.”
The company’s management had stated on its Q4 earnings call that TSLA could hit an automotive gross margin of 20% for FY23.
When it comes to the demand for its vehicles, Tesla’s management remained confident and stated that orders are exceeding supply. Musk added on the earnings call, “From a production standpoint we’ve got a shot at two million vehicles this year…we feel comfortable with 1.8 [million].” This production estimate is in line with Wall Street analysts’ expectations.
The lower-than-expected margins prompted long-time TSLA bull, top-rated Wedbush analyst Daniel Ives to lower the price target on the stock to $215 from $225 while keeping a Buy rating on the stock. The analyst’s price target implies an upside potential of 19.1% at current levels. Ives stated that the company’s softening margins continue to be “the elephant in the room” and will continue to be an overhang for TSLA stock.
Analysts continue to remain cautiously optimistic about TSLA stock with a Moderate Buy consensus rating based on 18 Buys, 10 Holds, and four Sells.