Shares of Tesla (TSLA) fell 9.75% on Thursday, hitting lows not seen since late January as the electric vehicle maker reported gross margins below 20% for the first time in almost three years.
Analysts on Wall Street reacted to the EV giant’s earnings report yesterday with profits falling to $2.5 billion from $3.3 billion a year ago, with a raft of estimate cuts amid concerns increased due to the pressure on margins.
The pressure comes after Tesla has cut prices six times since the start of the year in a bid to rekindle demand, with two of those cuts coming this month in the EV maker’s second quarter.
“It’s hard to say what the margin will be,” Tesla CEO Elon Musk said on the company’s earnings call when asked how low Tesla’s profit margin could get.
Wall Street’s reaction was quick. Jefferies kept a buy rating on Tesla, though the bank lowered its price target to $230 from $250, citing the company’s shrinking margins as a key concern.
“The first quarter did not provide strong confidence in pricing elasticity or a gross margin floor that prioritizes volume over near-term profitability,” Jefferies wrote in a note to clients.
Although Tesla has ramped up production and deliveries of its electric vehicles in recent quarters, resulting in near record earnings, production has outstripped demand. The company said it shipped 422,875 units and produced 440,808 in the first quarter.
Tesla co-founder and CEO Elon Musk on stage with the newly unveiled all-electric, battery-powered Tesla Cybertruck with broken glass on the windows after a demonstration that didn’t quite go as planned on November 21, 2019 at the Tesla Design Center in Hawthorne, California. – Tesla unveiled a new electric sport utility vehicle, slightly larger and more expensive than its Model 3, intended as a mainstream electric car. (Photo by Frederic J. BROWN/AFP) (Photo by FREDERIC J. BROWN/AFP via Getty Images)
“They’re backed into a corner,” Ronald Yesikov, vice president of automotive equity research at Guggenheim Securities, told Yahoo Finance Live following Wednesday’s report. “They have created a lot of supply that needs to find a home. And the only tool they really have is the price drop.”
Wedbush’s Dan Ives, a longtime Tesla bull, cut his price target on the stock to $215 per share from $225 on the back of declining margins.
“Musk & Co. have cut prices to further spur consumer demand in a shaky macro amid increasing global EV competition in this EV arms race,” Ives wrote in a note to customers after the release. “Without rose-tinted glasses: margins have become a sensitive topic that keeps Tesla investors awake at night.”
The story goes on
Overall, Tesla reported first-quarter revenue of $23.33 billion, slightly below Street’s estimate of $23.35 billion, with adjusted earnings per share of $0.85, below forecasts Estimates of $0.86. Tesla reported net income of $2.9 billion, down $700 million from the same period last year.
On a positive note, Elon Musk said on the earnings call that the company is targeting a late-Q3 “delivery event” for the cybertruck.
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