Tesla's Earnings And Price Cuts Are Defended By Elon Musk

A disappointing first-quarter profit margin for Tesla Tesla TSLA -8.55% was reported by the automaker on Wednesday, and its stock dropped on Thursday. Musk's stock didn't fall on Thursday. Elon Musk isn't so concerned. The CEO thinks that self-driving Tesla vehicles can yield a lot of profits. Wall Street is sceptical about that idea.

‍

The quarter as a whole seemed to have gone well. Tesla revealed that its earnings per share for the first quarter were 85 cents, which is almost in line with Wall Street's expectations. It was disappointing to see auto gross profit margins of just over 19%, which was below the analysts' projection of 21%, even when leasing is included but regulatory credits are excluded.

‍

In Tesla’s earnings conference call, Musk defended Tesla’s price cuts, saying they were the cause of the declines. The company decided it was better to push for a higher volume and a bigger fleet than a lower volume and a higher margin on this issue. In spite of this, Musk believes that the use of automation will result in the generation of significant profits by our vehicles in the future.

‍

A radical idea was even floated later on in the call by the CEO of the company. He said, “We are building a car, and we think autonomy will work out, and if it does, that asset will actually be worth a hell of a lot more in the future than it is now,” he said. “You can still sell this asset at a net present value of its future cash flows that is still very significant even when you sell it at no profit.” The profits from selling self-driving software will be made later on.

‍

Despite that, it appeared that investors were feeling a little nervous about the idea, Tesla stock was down about 7% in premarket trading at $167.80. S&P 500 futures SPX -0.45% and Nasdaq Composite futures COMP -0.40% lost about 0.7% and 1%, respectively, in premarket trading.

‍

According to Citi analyst Itay Michaeli, the strategy does appear to have some merit, but there is some disagreement on Wall Street about the idea.

‍

A report from an analyst said that Tesla's rationale for pursuing price cuts stemmed from lifetime vehicle revenues, and this is completely consistent with our own industry thesis that [autonomous vehicles] are the biggest value unlocker in this [industry] race. We need more evidence of [Tesla's] progress on Full Self Driving before we can trust this to anchor the Tesla investment thesis since Tesla's unique approach compared with the industry is quite different from the industry's.

‍

Following earnings, Baird analyst Ben Kallo kept his price target at $252, creating a buy rating for the shares. He rates the shares at hold and lowered his price target to $175 from $192 after earnings.

‍

A near-term project, as Musk pointed out, would be to upgrade the existing fleet to include FSD capabilities, which would greatly increase the value of the vehicles,” wrote Kallo. That is one reason why he believes that there is a lot to be optimistic about the stock. He sees other reasons as well. Besides the Dojo supercomputer, the Optimus bot, and residential heat pumps, the company has more longer-term plans.

‍

A Canaccord analyst based in New York said he too sees some merit in Musk's strategy for making Tesla a more efficient company, and was encouraged by Tesla's growing energy storage sales. Tesla has installed 3.9 gigawatt hours of battery storage in the first quarter, up from 0.8 gigawatt hours in Q1 2022.

‍

It is expected that Tesla will be able to lower the price of FSD software from $15,000 after it was announced that Tesla would drop the price of the software before the end of the month to boost sales of that product. The company is driving its razor/razorblade strategy, intentionally seeding the market with forward upgradeable, high margin potential vehicles, according to Gianarikas in his research report.

‍

Despite this, Gianarikas remains optimistic about Tesla's prospects under the current economic conditions. Gianarikas believes that the automotive industry as a whole is grappling with challenging conditions. However, he reduced Tesla's price target to $257 from $275 from the $275 that he previously set.

‍

In terms of margins or the autonomy strategy, Wedbush analyst Dan Ives was less sanguine.

‍

Despite the good demand metrics Tesla delivered, it is the softer margins that will weigh heavily on the shares. The analyst wrote on Thursday that Tesla delivered mixed results with solid metrics. It is not a narrative that many people are too fond of telling Tesla about how the FSD is driving the margin story going forward. We believe Tesla is now walking a tight rope between margin pressures and increasing Model Y/3 demand.”

‍

Analyst Jeffrey Osborne at TD Cowen rates the stock Hold; his target price for the stock has dropped to $150 from $170 following the earnings announcement. He is not convinced about the pricing or autonomy strategy. He rates the stock BUY. His price target remains at $215 from $225.

‍

In his letter on Wednesday, Osborne pointed out that Musk went back into the well and recycled previous comments, which were about FSD being completed by year end, demand exceeding supply, and vehicles appreciating in value over time, among others.

‍

One thing is certain after Tesla announced its quarterly results and the stock price will continue to fluctuate between bulls and bears for some time to come.

‍

The average analyst price target for Tesla stock has dropped around $5 since earnings were announced, which reflects the fact that 52% of analysts covering Tesla stock rate shares as Buys. The average Buy-rating ratio for stocks in the S&P 500 is approximately 58%.