Tesla Inc CEO Elon Musk on Wednesday signaled that the company would continue cutting prices to stoke demand for its electric vehicles (EVs), even at the expense of its industry-leading profit margins.
Musk said he has good reasons for doing so, as Tesla can financially withstand price cuts, giving it the upper hand against rivals.
“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,” Musk said on a call with analysts.
Photo: Bloomberg
The price drops have been dramatic. The base price of Tesla’s Model 3 has dipped below US$40,000 in the US for the first time in years, a cut of about US$7,000 from the start of the year.
That has eaten into the company’s income. Tesla’s operating margin was 11.4 percent last quarter, down from 16 percent the previous period and 19.2 percent a year earlier.
The Austin, Texas-based company declined to provide its automotive gross margin, a closely watched metric, for the first time in years, only saying it fell from the fourth quarter of last year.
Tesla chief financial officer Zachary Kirkhorn said on the conference call that margin shrinkage has not crimped Tesla’s capital expenditure programs to ramp up output over the next couple of years.
“We have a lot of space before that becomes something we have to revisit,” he said.
Despite the first-quarter slump, Tesla’s margins are still higher than other automakers. Last year, General Motors Co had an operating margin of 6.6 percent, while Ford Motor Co’s was just 4 percent.
Tesla executives said the company would boast some of the best operating margins in the business.
“They’re going to use the room in their margin to create more demand,” Robert W. Baird & Co analyst Ben Kallo said. “They can cut prices and box out other people.”
Tesla’s revenue rose 24 percent to US$23.33 billion last quarter, nearly in line with Bloomberg estimates of US$23.35 billion.
It reported regulatory credits of US$521 million, but profit excluding some items fell to US$0.85 per share, slightly below the US$0.86 average of estimates compiled by Bloomberg, and free cash flow slumped to a two-year low of US$441 million.
“Tesla is going through a rough patch,” Deepwater Asset Management LLC managing partner Gene Munster said. “They are holding things together, but investors want to see some of these trends start to improve.”
The EV maker said output this year would meet previous guidance for compound average annual growth of 50 percent over multiple years, adding that it is on track to deliver about 1.8 million vehicles this year.
It produced 440,808 units and delivered 422,875 vehicles last quarter, resulting in excess inventory of about 18,000.
Musk sought to ease concerns about that overhang, telling analysts on the call that orders are now outpacing production.
Production of Tesla’s long-awaited Cybertruck electric pickup is on track to start later this year at its plant in Texas, with a delivery event as early as the third quarter.
The company is also making progress on its next-generation vehicle platform, it said in a shareholder letter.
Those future product models would be unveiled at a “later date,” Tesla chief designer Franz von Holzhausen told an event last month.
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