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Written by: Sophie Lund-Yates | Hargreaves Lansdown
Revenue rose 24.8% to $23.3bn in the first quarter, reflecting a c.$3.0bn increase in automotive revenue to $20.0bn. Operating expenses were broadly flat at $1.9bn compared to last year. However, the group’s decision to cut prices and higher material and logistics costs, fed into an 8 percentage-point drop in operating margins to 11.4%. That was worse than the market expected, and operating profit was $2.7bn, down from $3.6bn.
There was a 44% increase in production, split across both Model S/X and Model 3/Y vehicles. Tesla delivered 422,875 vehicles, compared to 310,048 last year.
Cash flow fell over 80% to $441m, partly reflecting the lower profits.
Tesla said the Cybertruck is on track to begin production later this year at the Texas Gigafactory. The group also highlighted its expectations that profits will be supplemented by accelerating software sales.
The shares fell 3.7% in after-hours trading.
Margins were always going to be in the driving seat when it came to determining market sentiment this quarter, following Tesla’s sixth round of price cuts in the US this year. While the group’s valuation is in a more reasonable position than it has been, it’s still vulnerable. A large reason for this is it’s unclear where margins are going to settle as price cuts continue to come through the line, the extent of which can’t be fully mapped at this point, and which could see margins losing further traction. Grasping the nettle and sacrificing margin to get the top line moving is often the correct move, but only when done carefully and not for prolonged periods of time, otherwise the brand is comprised. The difficult economic conditions being faced by Tesla’s core customers means they need more convincing to part with the tens of thousands dollars required to drive away in one of Musk’s vehicles.
The sharp rally seen in Tesla’s valuation this year has left it wide open for attack, and doesn’t seem to have taken into account the high degree of uncertainty. Well-inflated profit margins have long been an attraction of Tesla, offering a rudder between the EV specialist and traditional auto makers, whose margins are thinner. Prior to results, analysts estimated Tesla’s 2023 overall gross margin to be around 22%, compared with 15% for Ford, according to Bloomberg. Following these numbers, there’s a lot of road left to traverse before that can happen. Competition, especially in China, is also incredibly tough. EVs are available at considerably lower price points than Tesla which could see revenue growth stall in this important growth region.
There have been stirrings of other potential issues too. While Tesla is generally seen as a force for good in the global fight against emissions, other factors, like its workforce management, open it up to questions from ESG-minded investors. Tesla’s Shanghai factory has been found to have weaknesses in its safety measures following a death there in February. Not only does this open the door for scrutiny, it could have ramifications for operational performance if the Chinese authorities decide to crackdown.
Demand for Tesla’s remains robust, and if production can be ramped up at pace then the horizon for more attractive per-unit costs looks rosy. There’s no denying Tesla’s remaining appeal, but the market is unlikely to fully replenish the group’s valuation until margins are pointing north.
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