Tesla Earnings: Profit Margins Contract for Third Straight Time, Driven by Price Cuts

Tesla Stock at a Glance

• Fair Value Estimate: $215
• Morningstar Rating: 2 stars
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow

Tesla Earnings Update

We maintain our $215 per share fair value estimate and narrow moat rating for Tesla TSLA following the company’s second-quarter earnings. Tesla shares fell immediately after the company’s results the market responded to management’s commentary that further price cuts could be coming later this year. At current prices, we view Tesla shares as overvalued, with the stock trading in 2-star territory.

In response to slowing demand, Tesla began cutting prices in the fourth quarter of 2022 and has continued through the first half of this year, leading to three straight quarters of lower average selling prices and lower automotive gross profit margins.

More Tesla Price Cuts Likely

We think the company is likely to cut prices in the second half of the year in response to other automakers also cutting prices, which would result in further margin declines. Accordingly, we reduced our 2023 automotive gross profit assumption.

However, we think prices will begin to stabilize by the end of the year as economic conditions improve, leading to 2023 being the cyclical low for margins.

During the earnings call, management highlighted the launch of the company’s first pickup truck, aptly named Cybertruck. Over the long term, we see this vehicle as having a relatively modest contribution to total deliveries, as we forecast a peak of around 100,000 vehicles per year, well short of management’s 250,000 target. However, the truck aims to show off Tesla’s new technology, which we view as crucial to Tesla’s brand, which is producing vehicles with the best technology.

Additionally, Tesla began production of its Dojo supercomputer. This aims to train Tesla’s autonomous driving software, which should allow the company to develop faster improvements and accelerate the timeline for the full launch. The full self-driving software should allow Tesla’s vehicles to have a third ancillary revenue stream, in addition to charging and insurance, which boosts the value of each car sold to Tesla over the long-run.