Tesla shares sank in early trading Thursday after CEO Elon Musk warned investors to brace for more pressure on the company’s already-shrinking profit margins. The electric vehicle maker has been forced to repeatedly cut prices this year to boost demand, taking a toll on automotive gross margins, which fell to a four-year low in the second quarter.
Musk said on the earnings call Wednesday that Tesla may have to keep lowering prices if interest rates keep rising. This indicates further margin declines are likely in the near-term as the Fed continues hiking rates to fight inflation.
“It does make sense to sacrifice margins in favor of making more vehicles, because we think in the not-too-distant future they will have a dramatic valuation increase,” Musk explained, alluding to his long-held belief that full self-driving capability will significantly boost the value of Tesla’s existing fleet.
In addition to potential further price cuts, Tesla faces margin pressure from heavy investments into new vehicles like the delayed Cybertruck, plus expensive in-house projects like Dojo, the AI supercomputer Musk plans to spend over $1 billion developing through 2023.
While Tesla remains on pace to manufacture around 1.8 million cars this year, output is expected to dip temporarily in Q3 due to factory upgrades. The production lull will likely exacerbate inventory buildup after deliveries lagged production over the past four quarters.
Q2 Results Beat Expectations but Show Shrinking Margins
Tesla delivered better-than-expected Q2 2022 earnings and revenue, but shrinking margins undermined confidence that profitability has stabilized after months of erosion.
Excluding certain items, Tesla earned $0.91 per share last quarter, topping analyst forecasts of $0.81. Total revenue jumped 47% year-over-year to $24.9 billion, surpassing expectations of $24.5 billion.
However, automotive gross margin excluding regulatory credits slid further to just 18.1%, the lowest level since Q2 2019. Back in January, CFO Zachary Kirkhorn boldly predicted Tesla could maintain over 20% margins for the full year. He walked back that forecast in April after margins dipped below 20% in Q1.
The ongoing margin compression indicates price cuts are still outpacing Tesla’s cost reduction efforts as it scales production. The company has cut prices repeatedly in 2022 to spur demand amid rising EV competition.
Inventory Continues Piling Up Despite Discounts
Tesla’s inventory glut continues growing despite substantial discounts offered this year to move metal. The company said it now has 16 days worth of supply globally, up from 15 days last quarter and just 4 days a year ago.
Production exceeded deliveries over the past four quarters, causing inventories to balloon while Tesla struggles to improve logistics efficiency. New factories in Austin and Berlin are delivering vehicles faster than the company can ship and sell them.
Musk declined to reveal how much Tesla aims to reduce production in Q3 during factory upgrade downtime. Back in January, he suggested Tesla could potentially manufacture around 2 million vehicles this year before walking back that guidance.
Cybertruck Delayed Again, Volume Production Pushed to 2023
The long-awaited Cybertruck will not arrive in volume before 2023, Tesla revealed. The company recently built its first Cybertrucks in Austin but said those are “release candidate” models not intended for customer deliveries this year.
Tesla did not update pricing or specifications for the radical electric pickup. It simply reiterated plans for deliveries to begin at some point in late 2022 without elaborating.
Analysts hoped the Cybertruck would help Tesla maintain strong delivery growth in 2023 amid a potential US recession. But volume production appears delayed until the second half of next year.
The tepid Cybertruck update comes after Tesla pushed back the new Roadster and Semi truck multiple times. Delays reflect persistent supply chain and production ramp challenges.
Nonetheless, Musk teased exciting progress on Tesla’s full self-driving software. He said Tesla is in early talks with a major automaker to license its autopilot system. This could become a lucrative new revenue stream if Tesla succeeds in developing fully autonomous cars.
Q2 Takeaways — Margin and Demand Headwinds Remain
In summary, Tesla faces slowing demand, shrinking profit margins, production lulls, and persistent delays of high-profile new vehicles.
Yet the company continues growing revenue at a breakneck pace while keeping capital expenditures in check. Given its pole position in the booming EV space, Tesla appears poised for many years of strong top-line growth barring a severe economic downturn.
But near-term headwinds will test Tesla’s ability to balance growth with profitability. Musk expects Tesla’s soaring valuation to eventually be justified by full self-driving capability and robotaxis. But that day seems far off, and the road ahead looks bumpy.
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