Earnings For Tesla Are Likely To Drop. Is This The Beginning Of The Price War?

Tesla TSLA -0.92% is expected to report lower earnings on greater sales on Wednesday evening after the electric-vehicle company reduced prices again to attract consumers.

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The EV fight has devolved into a pricing war, with established automakers investing billions to catch Tesla (ticker: TSLA). Investors will be able to determine who is winning based on the automaker's quarterly results.

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According to FactSet, Wall Street expects Tesla to earn approximately 85 cents per share on $23.7 billion in revenue. Tesla earned $1.07 per share on $18.8 billion in revenue a year earlier.

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Tesla reduced vehicle pricing dramatically in January, putting a strain on profits. On Tuesday, the EV manufacturer reduced the pricing of several of its vehicles again. According to the company's website, the price of a Model 3 rear-wheel drive has been reduced by $2,000 to $39,990. The price of Model Y, long-range, and performance cars has also been reduced by $3,000. So far in 2023, certain Tesla prices have fallen by about one-quarter.

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In early trading on Wednesday, Tesla stock is down 2.8%. It appears to be a reaction to the recent price decreases. The Nasdaq Composite Index is down 0.6%.

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Analysts predict that automotive gross profit margins will be slightly north of 20% in the first quarter of 2022, down from over 25% in the fourth quarter of 2022 and more than 30% in the first quarter of 2022.

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Canaccord analyst George Gianarikas forecasts automotive gross-profit margins of 20.5% and 20.7% for the first quarter and full year, respectively, despite all of the price cuts creating an earnings "nail bitter." He rates Tesla stock as Buy with a $275 price objective.

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Investors will be looking for margins above 20%, as well as management comments on margins for the rest of the year. Chief Financial Officer Zachary Kirkhorn stated on the company's fourth-quarter conference call in January that Tesla may maintain automotive gross profit margins above 20% in 2023. That was a full-year forecast. He did not break down his forecast by quarter. Investors would like to hear Kirkhorn's January prediction repeated.

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Investors may have to wait until the conference call to learn more. The call is scheduled to begin at 5:30 p.m. Eastern standard time.

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Investors will also want to hear about order activity and demand after car price reduction on that call. On the fourth-quarter earnings call, CEO Elon Musk stated that orders were coming in at double Tesla's manufacturing capacity. Another thing investors want to hear on Wednesday is that demand continues to outstrip supply.

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Lower profits might be mitigated by increased demand. According to Trade Algo, Tesla has not posted a year-over-year fall in adjusted profitability since the third quarter of 2019. Tesla earned 6 cents per share that quarter, down from 13 cents the previous year.

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Tesla's pricing savings have affected the whole car sector. In 2023, earnings at General Motors GM -2.22% (GM) and Ford Motor F -3.10% (F) are predicted to fall year on year. Ford and GM, on the other hand, continue to generate the majority of their money by selling traditional trucks and SUVs. How Tesla's EV pricing decreases affect those companies is something else for investors, analysts, and Tesla management to debate.

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Investors should expect volatility regardless of what Tesla management says. Following the results, options markets predict that shares will move 8% higher or lower. Over the last four quarterly reports, Tesla stock has risen about 8% on average. Over that period, the stock has risen three times and decreased once.

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The day after the company published fourth-quarter earnings, shares climbed 11%. Tesla stock has risen another 15% since then. As of Wednesday's trade, Tesla stock was up about 50% year to date. After dropping 65% in 2022, the stock has had quite a run. So far this year, the S&P 500SPX +0.01% and Nasdaq Composite have gained around 8% and 16%, respectively.

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