Margin Pressure On Tesla As EV Price War Intensifies

Despite rising competition and weak economic conditions, Tesla Inc (TSLA.O) is expected to see its first-quarter profits drop by more than three years.

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Over the last five months, the world's most valuable automaker, which controls almost half of the EV market on the U.S. mainland, cut sticker prices five times to help boost its sales in the latest quarter (ended March 31), but it also reduced its industry-leading profit margin as a result.

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According to 17 analysts polled by Trade Algo, Tesla will report a 23.2% auto gross margin for the quarter, down from 32.9 percent a year earlier.

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A quote from Tesla's executive chairman, Zachary Kirkhorn, suggested that the company's average selling price would be $47,000 across its models, and that margins would not drop below 20%. Analysts predict, however, that Tesla is going to cut prices further and to pressure margins further.

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There have been many investors who have expressed optimism that Q1 margins may have hit their bottom and that is what we anticipate that will happen, however, Bernstein analysts already believe that there will probably be further cuts to come in the months to come.

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It doesn't just come in the form of a $1,500 reduction in the price of the base Model 3 in Europe, Israel, or Singapore, but it also comes in the form of a 20% reduction in the price of the base Model Y in the United States, since Tesla cut prices there for a cumulative 11% since the beginning of the year.

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While Tesla has faced pressure as rivals such as Ford Motor Co (F.N) have stepped up competition in its home market even as consumers cut back their spending due to recession worries, it has also had to wrestle with more competitive rivals, such as BYD (002594.SZ) for the second largest market in the world.

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The Shanghai factory of Tesla suffered major problems on Monday, after work was disrupted after workers were informed that they would be losing their performance bonuses, which are linked to the factory's productivity, according to online discussions and posts.

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With an increase in production at the company's factories in Austin, Texas, and Berlin, led by billionaire Elon Musk, Musk has said the company will be able to improve margins due to economies of scale, depending on how fast production ramps up.

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A major factor that should assist Tesla in the coming months is the decline in lithium prices, especially in China, where a slump in demand for electric vehicles has left stockpiles of the metal piling up following a slump in the industry.

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In conclusion, George Gianarikas, analyst at Canaccord Genuity, stated that it is highly likely that Tesla's margins will remain intact due to the reduction in commodity prices.

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Tesla is targeting to deliver 1.8 million cars this year, although the automaker has mentioned in the past that if conditions are favorable, the automaker may deliver even more.

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A gain of about 50% has been recorded in the value of the company's shares over the past year, after a loss of 65% the previous year.