Tesla Up Over 5.52% on Earnings Beat, But Low Gross Margins Raise Concerns

Tesla is up slightly in afterhours trading Wednesday evening after the company beat Wall Street targets for fourth-quarter revenue and profit despite a sharp decline in vehicle profit margins. Additionally, remarks in the report sought to reassure investors that it can cut costs and continue to generate cash as competition intensifies in the year ahead.

The company said revenue was $24.32 billion for the three months ended Dec. 31, compared with analysts’ average estimate of $24.16 billion, according to IBES data from Refinitiv.

Additionally, Net profit for the quarter was $3.69 billion, or $1.07 per share, compared with $2.32 billion, or 68 cents per share, a year earlier. Adjusted earnings per share of $1.19 topped the Wall Street analyst average of $113.

At 00:05 GMT, Tesla is trading 5.52% higher.

Executives Address Profit Margins, Musk Says Recession is Probable

Tesla executive forecast that prices would stay relatively low, at an average $47,000, and that automotive profit margins, which dropped to a two-year low of 25.9% in the reported quarter, would be above 20%, according to Reuters.

After the report, Chief Executive Elon Musk, while addressing concerns that a weak economy would throttle buyers’ interest, said Tesla Inc’s aggressive price cuts have created a wave of demand for its electric vehicles.

Musk Optimistic About Demand

Deep price cuts in January have positioned Tesla as the initiator of a price war, but its forecast of a 37% rise in car volume for the year, to 1.8 million vehicles, was down from 2022’s pace.

Tesla investors are focusing on the company’s long-term target of a compounded 50% annual rise in sales, but this could prove difficult due to the possibility of a weak global economy.

Musk addressed this issue at the start of a conference call with investors and analysts. “These price changes really make a difference for the average consumer,” he said, adding that demand was roughly double production in January and that sales in 2023 could hit 2 million vehicles, absent external disruption.

Musk also said recession was probable, but while acknowledging concerns about the uncertain economy, he said it is “accelerating our cost reduction roadmap and driving towards higher production rates” in the near term.

Some Investors See More Upside to Profitability

Today’s early gains suggest investors are optimistic about Tesla’s future because of the company’s profitability. Analysts had said Tesla’s profitability gave it room to cut prices and pressure rivals. Hence, the so-called price war.

For example, consider that the company’s $9000 in net profit per vehicle in the past quarter was more than seven times the comparable figure for Toyota Motor Corp in the third quarter. Although this figure was down almost $9,700 in the third quarter.

Some Investors See Red Flags

Tesla boss Elon Musk has introduced big discounts to car prices, a potential sign of panic amid weakening demand – or an opportunistic move to knee cap rivals, according to Reuters.

Even the most bearish investors acknowledge that the $450 billion car company’s industry-leading profit margins give it plenty of ammo. However, they see potential headwinds if the global economy turns gloomy. If this were to happen, even strong profit margins may not be enough to prevent a derailing of Elon Musk’s plan for total market domination.

Wednesday’s earnings report did beat the estimates but it also raised a red flag, profits fell from their peak.