Will Tesla’s Price Cuts Bite Into The Margins?

(CTN News) – Electric vehicle maker Tesla (TSLA) is reporting Q1 earnings after the bell on Wednesday, so investors will be keen to see if the company can keep up the good times rolling after a staggering 50% gain year to date.

It is estimated that Tesla will report a top-line revenue of $23.37 billion as well as an adjusted EPS of $0.860 on an adjusted basis, according to analysts.

As a result, Tesla would have reported $24.32 million in revenue in Q4 as opposed to $24.42 million a year earlier, a slight dip from the $24.32 million reported in Q4.

There is an expectation that Tesla will report an adjusted net income of $3.03 billion in the first quarter of 2019, down a billion from the second quarter of last year and $700 million from the year before.

In light of the fact that revenue remained flat-ish and profits dipped, the effects of margin compression might be playing a role.

There have been a number of price cuts implemented by Tesla in the United States, Asia, and some European markets during the first quarter of this year, most recently in the United States this week.

These price cuts will be closely watched by investors to see what effect they have on gross margin figures, which last quarter were 23.8% for the industrial sector, and 25.9% for the automotive sector – both of which were slightly less than in the previous quarter.

As a result of the price cuts, Wall Street banks such as Evercore ISI have attempted to quantify them. A $500 cut to gross profit is equivalent to 100bps of gross margin pressure, which implies 19% gross margin pressure for Q2/Q3 Auto, according to the analysts earlier this month.

If we assume that the US price cut average translates to $1k globally and that half of that is offset by cost improvements…

The JPMorgan analyst Ryan Brinkman has been wary of the price cut effect on Tesla’s profitability, as well as the profitability of other electric vehicle manufacturers, as well.

“We have been cautious about the profit impact of Tesla’s price cuts, writing the lower prices are negative for Tesla, but less negative for GM and Ford (given they will lose even more money on EVs in the meantime).

Despite having other profit centers to offset these losses), and most negative for pure-play battery electric automakers competing with Tesla (such as Rivian), as they, too, are likely to lose more money on EVs as well, even though they have other profit centers to offset these losses,” Brinkman wrote earlier this month.

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