Electric vehicle leader Tesla reported disappointing first-quarter gross profit margins, and the stock fell sharply.
Elon Musk doesn’t seem too concerned. The CEO bets on future profits from Tesla self-driving vehicles (ticker: TSLA). Wall Street’s opinions on this idea are mixed.
The quarter looked okay overall. Tesla reported earnings per share of 85 cents for the first quarter, which was roughly in line with Wall Street estimates. But the auto industry’s gross profit margins, including leasing but excluding regulatory credit, came in at about 19%, below the 21% forecast by analysts.
Tesla’s price cuts were responsible for the declines. Musk defended the cuts at Tesla’s earnings conference. “We believe the right choice here is to push for higher volumes and a larger fleet, as opposed to lower volume and higher margin,” Musk said. “However, we expect that over time our vehicles can achieve significant gains through autonomy.”
Later in the conversation, he even put forward a radical idea. “We’re building a car that, as autonomy develops, and we think it’s going to be where this asset actually is, it’s going to be worth a hell of a lot more in the future than it is now,” the CEO said. “It’s technically possible to sell it for no profit but still have the net present value of future cash flows associated with that asset.” [be] very significant.” The profits come later through the sale of self-driving software.
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Investors are a little nervous. Tesla shares are down about 8.7% to $164.89 in midday trade. The S&P 500 and Nasdaq Composite are each down about 0.4%.
And Wall Street analysts have mixed thoughts. However, Citi analyst Itay Michaeli sees some merits in the strategy.
“Tesla’s rationale for price cuts was based on lifetime vehicle earnings, a view that is fully consistent with our own industry thesis [autonomous vehicles] This is the biggest stat unlocked by it [industry] Race,” the analyst wrote in a report. “However, to anchor the Tesla investment thesis, we would need to see more evidence [Tesla’s] Advances in fully self-driving given Tesla’s unique approach versus the industry.”
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He gave the shares a hold rating and lowered his price target to $175 from $192 after earnings. Baird analyst Ben Kallo Rates left his target price at $252 following the gains. He rates stocks as Buy.
“Musk noted that the most attractive near-term project is to upgrade the existing fleet with FSD capabilities, which would greatly increase the vehicles’ asset value,” Kallo wrote. That’s reason for optimism around the stock. He also sees other reasons to be optimistic. “Other longer-term projects include the Dojo supercomputer, the Optimus-Bot, and home heat pumps.”
Canaccord analyst George Gianarikas was also encouraged by rising energy storage sales. Tesla installed 3.9 gigawatt hours of battery storage in the first quarter, up from 0.8 gigawatt hours in the first quarter of 2022. He also sees some merits in Musk’s strategy.
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“The company is driving its razor/razor blade strategy and planting intentionally
the market with forward-upgradable vehicles with high margin potential,” Gianarikas wrote in a research report. He expects Tesla to lower the price of FSD software from $15,000 to boost sales of that product.
Overall, Gianarikas isn’t as concerned about price cuts and margins, pointing out that the economy is making it tough for the entire auto business, not just Tesla. He has a Buy rating on the stock, but the price target has been cut to $257 from $275.
Wedbush analyst Dan Ives wasn’t as bullish on margins or autonomy strategy. “
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“Let’s call it what it is: Tesla delivered mixed results on solid demand metrics, but the elephant in the room is soft margins, which will weigh on shares,” the analyst wrote Thursday. “The FSD driving the margin story isn’t a narrative that many are huge fans of, and we believe Tesla is now walking a fine line between margin squeeze and margin squeeze. Encouraging greater global demand for the Model Y/3.”
He still advises buying shares. Its price target fell from $225 to $215 per share. TD Cowen analyst Jeffrey Osborne rates stocks; Its price target fell to $150 per share from $170 following the gains. He doesn’t sound entirely convinced of the price or autonomy strategy.
“Musk dove into the well, recycling previous comments about FSD being ready by the end of the year, demand outstripping supply and vehicles an accretion over time,” Osborne wrote on Wednesday. “We question all of these assumptions.”
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New Street Research analyst Pierre Ferragu seems more confident that the weakness is related to the broader economy. “Recession scenario is active,” Ferragu wrote on Thursday. “Demand [for Tesla’s vehicles] remains above supply but at the expense of a series of price cuts responding to a sharp drop in auto demand in China and several signs of weakness around the world.”
He advises buying Tesla shares and reduced his target price from $320 to $300 per share.
Reasons behind the stock’s decline as well as Tesla’s pricing strategy continue to be debated by analysts and investors. One thing seems certain: Investors are in for a difficult few months.
Overall, 52% of the analysts covering Tesla stock rate stocks as Buy. The average buy rating for stocks in the S&P 500 is around 58%. The average analyst price target for Tesla stock is now around $198 per share, down about $5 after earnings.
Write to Al Root at [email protected]