Tesla’s Margins: How Low Will They?Go?

Aug. 31, 2023 8:45 AM ET Tesla, Inc. (TSLA)

Summary

• Tesla stock has rallied through most of 2023 during a time when consensus was estimating sales to grow +23% y/y but earnings to decline 15%.
• In Q2 2023, Tesla’s operating margins declined to 9.6% after enacting a series of price cuts.
• Tesla’s electric market share peaked at 78% in 2018 and stood at 62% in 2022. By 2026, Merrill Lynch estimates it will decline to 18%.
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The article discusses the declining operating margins of Tesla, Inc. (TSLA) and the factors contributing to this trend. Here are the key points from the article:

Margin Decline: Tesla’s operating margins have been on a declining trend, falling from 17.2% in Q3 2022 to 9.6% in Q2 2023. This decline in margins is due to Tesla’s decision to lower prices in order to boost sales volumes.

Reasons for Margin Decline: Tesla has lowered prices to ensure that certain models qualify for electric vehicle (EV) tax credits and to address higher interest rates. Higher interest rates effectively increase the cost of financing for customers, and Tesla has responded by offering 84-month financing to lower monthly payments. Lowering prices also helps reduce monthly payments for customers.

Competitive Factors: The article suggests that competitive factors are at play, as Tesla faces competition in the EV market. Tesla’s pricing strategy may be aimed at gaining market share and maintaining its dominant position in the EV industry.

Comparison with Other OEMs: Tesla’s operating margins have continued to decline while other major global original equipment manufacturers (OEMs) have maintained relatively stable margins or experienced improvements. This suggests that Tesla’s margin decline is not solely due to macroeconomic factors but rather a strategic decision.

Future Margin Expectations: Tesla’s focus on increasing volumes and market share is expected to continue, which may further pressure operating margins. The article estimates that Tesla’s Q3 operating margins could decline to a level between those of Honda and Volkswagen, with a midpoint estimate of 7.8%. A more bearish scenario would see margins reaching a level closer to General Motors (GM) at 6.2%.

Medium-Term Optimism: Despite the margin challenges, there is optimism for Tesla’s medium-term prospects. Tesla’s move from the CCS to the NACS EV charging standard may help the company take market share from competitors like Toyota and Honda. Tesla’s brand perception as a premium EV manufacturer has remained strong even as prices have been lowered.

Technical Analysis: The article includes technical analysis of Tesla’s stock price, suggesting that while some volatility may occur, another high in the stock price is likely before a major low is reached. The key levels to monitor include $325 as strong resistance and the August low of around $213.

In conclusion, the article highlights the challenges faced by Tesla in maintaining its operating margins as it pursues increased sales volumes and market share. The company’s pricing strategy and competitive dynamics in the EV market will play a crucial role in determining its future margin levels.

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