Under-pricing one’s competitors is a double-edged sword. Sure, Tesla’s series of electric vehicle (EV) price cuts sparked a price war and helped it maintain its dominant market share. It also put tremendous pressure on EV-industry rivals like Lucid Group (NASDAQ:LCID), which has struggled to compete against the much bigger and better-capitalized Tesla (NASDAQ:TSLA).
However, it’s been challenging to assess the full impact of Tesla’s price-reduction strategy. The company’s delivery numbers in China disappointed Wall Street, and Tesla did actually lose some of its market share recently.
Yet, the true litmus test of Tesla’s price-slashing strategy is its third-quarter 2023 results. They were released after the market closed on Oct. 18 and represented one of the most highly anticipated earnings releases of the year.
Now we come to the billion-dollar question. After implementing 6%-or-greater price reductions across the company’s EV models in just the third quarter, was Tesla CEO Elon Musk’s tactic a hit or a miss? As usual, the answer is complicated but nonetheless contains insights into the seemingly never-ending war for EV-market dominance.
Tesla earnings reaction: Fear, front-running and relief
In the 2020s, the financial markets have become so efficient that they price in events before they even happen. At least, that’s what it felt like as TSLA stock dropped nearly 5% during the Oct. 18 trading session — before the company had even released its quarterly earnings results.
Granted, the stock market as a whole was in the red that day. Still, it felt like short-term traders expected disappointing third-quarter results from Tesla. Perhaps the aforementioned China-delivery data is what kept so many investors on edge.
However, a more likely explanation is that traders were bracing for a sizable margin decline. After all, that’s the drawback of deep price cuts. A company will sell more products, but the profits per sale will be reduced.
Thus, analysts expected Tesla to report a Q3 2023 gross margin of 18.02%, versus 25.1% in the year-ago quarter and 18.2% in the second quarter. As it turned out, Tesla’s actual gross margin for the third quarter was 17.9%, a slight miss but nothing catastrophic.
Sometimes good enough really is good enough. Despite all of the pre-earnings fear and loathing, TSLA stock as much as 1.5% in after-hours trading as traders weighed the company’s non-disastrous profit margins.
Margin issues show up in the numbers
However, investors shouldn’t take the wrong message from all of this. Clearly, Tesla’s shrinking margins took a toll on its top- and bottom-line results.
Tesla’s Q3 revenue of $23.35 billion fell short of the analysts’ consensus estimate of $24.06 billion. Moreover, the company posted adjusted net income of $2.3 billion and adjusted earnings per share of 66 cents, missing Wall Street’s consensus calls for $2.56 billion and 74 cents, respectively.
Hence, the seemingly almighty Tesla just broke its long-standing streak of quarterly EPS meets or beats. It just goes to show that even an industry dominator like Tesla can falter from time to time.
Did Tesla really falter? It’s encouraging at least that the company reaffirmed its 2023 goal of producing 1.8 million vehicles. On the other hand, producing EVs isn’t the same as selling them. There’s also still the question of whether Tesla will generate decent profit margins on the vehicles it sells during the current quarter.
Will the Cybertruck be a blockbuster or a bust?
Then there’s the Cybertruck. This is Musk’s oddball invention, shaped like a spaceship and not really a truck by any conventional definition. Yet, it’s a Tesla product, so it could conceivably be a game changer.
Deliveries of the Cybertruck are still on track for later this year, but the more normal-looking and reasonably priced Model Y and Model 3 EVs are undoubtedly Tesla’s bread and butter. For the time being, the Cybertruck remains a show-me story for Tesla.
Morgan Stanley (NYSE:MS) analyst Adam Jonas apparently hasn’t observed blockbuster demand for Tesla’s angular EV.
“Cybertruck — very little enthusiasm on Tesla’s next model,” Jonas reported.
Moreover, by the morning of Oct. 19, TSLA stock was in the red. This may have occurred because Musk warned that the Cybertruck will not be profitable until 2025.
Again, the Cybertruck is just the icing on the cake for Tesla — not the cake itself. Now it’s a question of whether Musk will persist with his price-cutting path for Tesla’s most popular EV models.
Musk is unpredictable, so we’ll just have to wait and see. For the time being, Tesla’s stockholders can breathe a sigh of relief — assuming they didn’t dump their shares pre-earnings.
