Tesla Inc.’s margins felt the sting of price cuts in the latest quarter, and analysts are hotly debating what comes next for the automaker.
Shares of Tesla
TSLA,
were off 7% in premarket trading Thursday after the company met adjusted profit expectations for the latest quarter but saw a drop in margins.
The electric-vehicle manufacturer slashed prices on its cars at numerous points this year in the face of investor concerns about demand. Wednesday evening’s earnings report showed the flip side of that move.
“The Q1 margin miss confirms that price cuts weren’t offset to the extent previously expected,” wrote Citi Research’s Itay Michaeli. “This, along with recent Q2 price cuts, could dampen [near-term] sentiment since margins will likely come to be viewed as more vulnerable with Tesla fully committed to 2023 volume targets amid a softer macro backdrop.”
He rates the stock at neutral and took his price target down to $175 form $192 previously.
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Tesla’s decision to reduce prices “does not come without pain as we now believe margins will get worse before they get better,” added RBC Capital Markets analyst Tom Narayan.
He noted that Tesla’s management says it’s playing a long game as the company tries to get more vehicles into the hands of consumers.
The company “believes the lifetime value of a new customer exceeds the lost revenue from the price cuts, so growing volumes is still the right decision,” Narayan said in his report. “We think the after point of sales value of a Tesla owner greatly exceeds that of traditional OEMs [original equipment manufacturers]; and in conjunction with its leadership position, provides them with greater upfront pricing flexibility.”
Still, he has some short-term questions about how the price cuts will play out.
“Unknown is consumer price elasticity, which deteriorates with financial instability,” Narayan wrote. “And another thing that has us worried is consumers learning to “hold out” for lower pricing. Getting into a cycle where the consumer is trained to wait for the incentive is never a great place to be in.”
He rates the stock at outperform but cut his price target to $212 from $217.
Shares of other car companies, including Ford Motor Co.
F,
and General Motors Co.
GM,
were each off more than 1% in Thursday’s premarket trading, and Baird’s Ben Kallo said that Tesla’s price cuts were “wide enough to put pressure on EV peers.”
He also sees the possibility that the company turns up the heat further going forward.
“TSLA’s shareholder letter noted that the company intends to leverage its position as a cost leader while other automakers work through unit economic challenges related to their EVs,” he wrote. “Other EV upstarts and legacy OEMs have targeted operating margins of mid-single-digits by mid-decade, and we estimate that TSLA still has room to reduce price while profitably manufacturing vehicles and energy storage products.”
Kallo has an outperform rating and $252 price target on Tesla shares.
