Tesla's shrinking margins are 'keeping investors up at night'

Tesla's shrinking margins are 'keeping investors up at night'

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Tesla shares dropped Thursday as investors zeroed in on the company’s drop in margins in its Q1 earnings report. 
Margin concerns are ‘keeping Tesla investors up at night,’ said Wedbush analyst Dan Ives. 
Here’s what Ives and other Tesla analysts are saying about Tesla’s earnings report and the stock. 

Tesla shares dropped Thursday as investors zeroed in on declining margins at the electric vehicle maker, prompting some analysts to reduce price targets and weigh on the company’s strategy of cutting prices to uphold demand. 

“With no rose-colored glasses: margins are now a delicate issue that are keeping Tesla investors up at night,” Wedbush analyst Dan Ives said in a note to clients Thursday. 

Tesla shares fell 7% to $167.69 during the session. The stock was still up about 36% so far in 2023. 

Tesla’s first-quarter results included automotive gross margin excluding federal credits of 19.3%, sliding from 29.1% in the first quarter of 2022. Its operating margin, a profitability gauge, fell to 11.4% from 19.2% in the same period a year ago. 

Tesla CEO Elon Musk indicated the company’s priority for now is growth over profit and said the company is  navigating through an “uncertain'” macro environment. 

“[It’s] better to ship a large number of cars at a lower margin and subsequently harvest that margin in the future as we perfect autonomy,” Musk told analysts during Tesla’s conference call Wednesday. 

Net income dropped by 24% to $2.51 billion from a year ago, partially pressured by Tesla’s price cuts. The latest round of cuts was issued just before the first-quarter results were released late Wednesday. Price tags on some Model Y units were reduced by $3,000. 

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Here what some analysts are saying about Tesla’s stock and its earnings report: 

Wedbush analyst Dan Ives – cut price target to $215 from $225. 

“The near-term margin pain for long-term demand/volume gain is a strategy the Street is mostly on board with, however dipping below the magical 20% threshold is a concern,” said Ives. “While the bearish 16%-18% gross margin number did not happen and Auto GM was better than worst-case fears, Tesla is perfectly comfortable going below 20% with Street questions about the trajectory going forward,” he said. 

The company “walks a tight rope” between margin pressure versus driving stronger global demand for its Model Y and Model 3 vehicles. Its delivery guidance of 1.8 million is achievable, said Ives. 

“In a nutshell, we remain very bullish on the Tesla story, HOWEVER this margin compression and price cut narrative must be carefully managed over the coming quarters as it now emerges as a clear overhang on the stock.” 

CFRA senior equity analyst Garrett Nelson – cut 12-month price target to $250 from $275 

“With not much in the way of new developments, and the company merely meeting Street expectations instead of beating them despite a modest gross margin miss, we view the stock’s decline …. as understandable,” said Nelson. 

“But with Austin and Berlin [factories] continuing to ramp, first deliveries of the Cybertruck, groundbreaking of the Mexico plant expected in the coming months, and a low-priced coupe that we believe will be introduced in ’24, we remain at a Strong Buy.”

David Trainer, CEO of New Constructs – “Shares could trade as low as $28” 

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“Tesla has grown deliveries at less than the 50% year-over-year (YoY) ‘goal’ in four straight quarters as well as for the full year 2022. If the company cannot meet its own growth goals, no matter how lofty, then the time has come for bulls to re-evaluate their growth expectations,” said Trainer in a note from his investment research firm. 

“TSLA Has 85%+ Downside Even If Units Sold Grows 3.5x,” he said. “If we estimate more reasonable (but still very optimistic) margins and market share achievements for Tesla, the stock is worth just $28/share. Here’s the math, assuming Tesla’s: 

Net Operating Profit After Tax margin is 13% in 2023 and falls to 7% (equal to Toyota’s TTM margin) in 2023–2031, • revenue grows at consensus rates in 2023 (26%), 2024 (30%), and 2025 (23%), 
revenue grows 10% a year from 2026–2031, and 
invested capital grows at a 6% CAGR from 2023-2031, then the stock would be worth just $28/share today – an 85% downside to the current price.”

Jefferies analyst Philippe Houchois –  “Still looking for a margin floor” 

“Guidance of 1.8 million units maintained but Q1 did not give great confidence on price elasticity or a gross margin floor given priority on volume over near-term profitability,” he wrote in a note that maintained Jefferies buy rating on Tesla with a $230 price target. 

“No gross margin guidance into Q2 likely to trigger some downward revisions to consensus, although cost indicators (logistics, commodities at worst point) and clear improvements in lithium cost.”