Tesla stock drops. Earnings show it’s just an automaker.

Price wars have consequences, even for Tesla, the world’s most valuable car company.

Tesla(Stock ticker: TSLA) First Quarter Earnings, mentioned It met expectations Wednesday night, but auto gross margins in the first quarter were poor. No matter how investors slice and dice the numbers, the results will leave them with questions about electric vehicle demand and Tesla’s pricing strategy.

Automotive gross margins, excluding regulatory credits, came in at less than 16%, down from about 21% in the fourth quarter of 2022. This is the first time that number has been below 20% since the second quarter of 2020.

Including leases, the auto business generated gross profit margins of about 19%, below Wall Street’s forecast of 21% and less than the 20% bottom line investors were looking for.

Some analysts model margins excluding credits and leasing, which makes it difficult to say exactly how big the margins should be. Bottom line for investors: Less than 20% is not what they wanted to see.

Pricing is the main reason for the low margin. The dealer average price of a vehicle sold, calculated by taking auto sales plus rental income and dividing by deliveries, was about $47,200, down from about $54,400 in the first quarter of 2022.

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The gross profit margin for the car sold, including the lease, was about $8,600. A year ago, that figure was about $15,700.

It’s not a strong showing for the electric car maker. Jesse Cohen, an analyst at Investing.com, called the results disappointing. “With our first-quarter earnings, we have reduced our belief in Tesla’s ability to accelerate revenue growth and expand operating margin,” he said.

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Tesla stock is down 4% in after-hours trading Wednesday, after already dropping 2% during the regular session. the NASDAQ Composite And

Standard & Poor’s 500

Almost flat finished.

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The rest of the quarter looked fine. Tesla reported earnings of 85 cents per share, which met expectations, on sales of $23.33 billion, just below forecasts of $23.67 billion.

Tesla’s other businesses did well, bringing in record gross profits of $303 million. Tesla posted 3.9 GWh of battery storage in the quarter, up about 300% year-over-year.

Reported total operating profit came in at $2.7 billion, short of Wall Street’s forecast of $3 billion. Operating profit margins came in at 11.4%, down from 19.2% in the same quarter last year. Excluding stock-based compensation, operating profit margins were approximately 13.2%. RBC analyst Tom Narayan was looking for profit margins excluding stock-based companies to come in at around 15.3%.

But stock-based compensation is still an expense and operating profit margins of 11% make Tesla look like a traditional automaker. Toyota Motor (TM)’s fourth quarter operating profit margin was approximately 10%.

“In the current macroeconomic environment, we see this year as a unique opportunity for Tesla,” the quarterly report reads. “As many automakers work through challenges with unit economics for their electric vehicle programs, we aim to cement our position as a cost leader.”

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Tesla appears to be stepping on the throats of the competition and is willing to use car prices to do so. Tesla’s problem is that general motors (GM) f Ford Motor (F) They still make a lot of money in their traditional car business. Losses in these companies’ electric vehicle business have yet to be recorded, which means Tesla could take advantage of the cost position early on.

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CEO Elon Musk spoke about pricing on the company’s earnings conference call Wednesday night. He said he does not want to eliminate any competition for electric cars, adding that he is opening up Tesla’s supercharging network for other electric cars.

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In general, Musk wasn’t too concerned about margins for the quarter. He has been focusing more on the autonomy of the car and wants to get the most cars on the market as quickly as possible. With more Tesla cars on the road, Tesla could generate more profit by selling self-driving software to all of them. That’s the plan anyway.

Fully autonomous driving is still in the future. In the near term, Musk added that higher interest rates is a factor in the affordability of the vehicle that Tesla is considering.

Chief Financial Officer Zachary Kirkhorn, on the company’s fourth-quarter call in January, said Tesla could hit auto gross margins by 20% for the full year. He didn’t back down from that level explicitly on Wednesday and spoke of the cost reductions that still need to be achieved through better use of Tesla’s new factories. He added that recent price cuts are “lowering the floor” for auto gross margins, excluding regulatory credits.

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Investors also care about demand trends. Musk said that demand continues to exceed supply.

“From a production standpoint, we got 2 million cars this year… we feel comfortable with 1.8 [million]Musk added.

Wall Street expects about 1.8 million deliveries in 2023. Musk’s comments are a silver lining for investors.

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Another positive aspect is that costs are falling. The car averaged about $38,600 to produce, down from the Q2 2022 peak of $42,700. The type of vehicle required affects both the price and cost calculations, so investors should use the cost calculation as a rough guide only.

The non-automotive business was another positive. Gross margins, excluding leasing, were about 8%, up about 10 percentage points year-over-year. William Stein, an analyst at Truist, noted that the service’s revenue, at $1.8 billion, was at an all-time high.

The bulls will take some consolation from the pros. But for now, Tesla is still mostly a car company. More than 90% of the total profit generated comes from the sale and leasing of cars.

Write to Al Root at [email protected] and Callum Keown at [email protected]

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