Tesla’s decision to repeatedly slash EV prices put pressure on margins, causing profits to fall 44% to $1.85 billion in the third quarter from the same year-ago period, the company reported Wednesday.
Tesla reported revenue of $23.35 billion in the third quarter, which gained 9% year-over-year thanks to higher vehicle deliveries and growth in other parts of its business. Analysts polled by Yahoo Finance estimated revenue of $24.1 billion.
While an increase in sales is positive, the company’s continued price cuts has squeezed margins — a trend that has continued for the past several quarters. Tesla reported gross margin of 17.9% in the third quarter, falling from 25.1% in the same period last year. It’s also down from Q2 when it reported margins of 18.2%.
The automaker missed Wall Street estimates on revenue and earnings. Shareholders seemed to have braced for Tesla’s Q3 earnings earlier in the day, with shares closing down 4.78% to $242.68. Shares have risen in after-hours trading by 1.5%.
Tesla closed the third quarter with a free cash flow of $800 million, down from $1 billion last quarter.
Price cuts and costs
Tesla attributed its fallen profitability margin largely to its reduced pricing of vehicles. In the third quarter, Tesla cut prices for its Model S and Model X luxury vehicles by as much as $18,500 per car. Price cuts for the more popular and affordable Model 3 and Model Y continued into October.
Tesla also pointed to increasing operating expenses driven by Cybertruck, AI and other R&D projects that the company did provide further details on. The cost of idling its Fremont, California factory for upgrades and ramping production also chipped away at its net income. Tesla also cited foreign exchange impact as a negative factor.
On the upside, the company pointed to growth in vehicle deliveries, reduced cost per vehicle and the $7,500 Inflation Reduction Act credit benefit, gross profit growth in its energy storage business and growth in regulatory credits. Tesla brought in $554 million in zero emission tax credits in the third quarter, nearly double the amount it received in the same period last year.
Tesla hasn’t changed its outlook for the year, saying it still plans to will deliver 1.8 million vehicles by the end of 2023.
In Q3, Tesla delivered 435,059 vehicles, which was nearly 7% lower than deliveries in Q2. That was expected, though, due to a planned factory shutdown.
If Tesla wants to make it to its 2023 sales goal, it’ll have to fill a 480,000 vehicle gap. The Cybertruck would likely fill that void. But with the delivery event now scheduled for November 30, few are expected to be delivered by the end of the year.
That means price cuts may be the go-to strategy for the fourth quarter. That’s especially true if we zoom out and look at China sales, which has shown some softening. Demand for Tesla vehicles in China, which has historically been a top market for the automaker, is waning as local EV companies like BYD gobble up market share.
“Pricing is a key factor that could help Tesla make up for a possible demand drop and boost revenue,” said Jesse Cohen, senior analyst at Investing.com. “As such, I would not be surprised if Tesla seeks further price hikes in the weeks ahead as trouble starts to brew at some of its competitors, including Lucid Motors and Rivian.”
“The big question is if this is just a blip, or signs of a bigger shift among consumers as rising interest rates and a weaker economic backdrop discourage consumers from making big-ticket purchases,” continued Cohen.