Tesla shares fell in US trade yesterday as the electric vehicle maker reported a material compression in operating margins and a slump in cash generation due to a broad price reduction.
Tesla has slashed the price of their vehicles in an attempt to attract more customers. After a series of price cuts over the past year, the Model 3 now starts at less than $40,000.
Increasing competition would have been a factor in deciding to build market share on pricing as traditional automakers ramp up investment in their EV offerings. Tesla has been seen as a premium brand, and the move to lower prices will diversify their customer base before traditional car makers snatch share in the budget area of the market.
“Tesla is still an aspirational brand in the USD 60,000-120,000 range. EVs from traditional premium automakers are still playing catch-up with Tesla in terms of performance and the overall user experience,” said Orwa Mohamad, Analyst at Third Bridge.
The move has shown early signs of success with robust revenue figures. Revenue for Q1 2023 was 24% higher than the year prior at $23.3bn – but was lower than the $24.3bn generated in Q4 2022.
Operating margins in Q1 were 11.4% compared to 19.2% a year ago.
The prospect of lower operating margins for the foreseeable future was the overriding factor in sending Tesla shares down 7% in the pre-market.
“Margins were always going to be in the driving seat when it came to determining market sentiment this quarter, following Tesla’s sixth round of price cuts in the US this year,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.
“While the group’s valuation is in a more reasonable position than it has been, it’s still vulnerable. A large reason for this is it’s unclear where margins are going to settle as price cuts continue to come through the line, the extent of which can’t be fully mapped at this point, and which could see margins losing further traction.”