Nasdaq 100 analysis: Tesla stock falls as price cuts hurt margins

Key takeaways

• Tesla shares are falling following the release of second quarter results
• Price cuts helped drive record deliveries but sent margins to their lowest level in years
• Sales and earnings beat overshadowed by fears more price cuts are to come
• Tesla also warns production will drop in Q3, as inventory levels continue to rise
• Margin pressures will heighten pressure to advance self-driving tech using AI
• Investors fretting over short-term outlook today, but long-term prospects getting more exciting

Tesla stock falls after Q2 earnings

Tesla shares are down over 4% in extended hours trade after releasing second quarter earnings late yesterday.

Let’s take a quick look at the headline results. Revenue was up 46% from last year at $21.3 billion and adjusted EPS increased 20% to $0.91. That was a beat compared to Wall Street’s forecasts for revenue of $24.3 billion and earnings of $0.81.

So, let’s take a look at why Tesla stock is coming under pressure despite its headline figures beating expectations…

Tesla price cuts hurt margins

Tesla delivered a record number of vehicles in the second quarter after cutting prices and introducing new incentives such as rebates to help drive up demand. However, this has crimped the amount it makes it on each vehicle and caused Tesla’s gross margin to hit its lowest level in four years at just 18.2% in the second quarter.

Tesla has industry-leading margins and has said it is willing to wield this as a weapon to ensure demand stays healthy. Its profitability is still much higher than traditional automakers and loss-making EV rivals despite the contraction we have seen in 2023.

Tesla says more price cuts could be on the way

CEO Elon Musk said Tesla is willing to cut prices further if it needs to, especially if interest rates keep rising so it can counter any rise in financing costs that would make its vehicles more expensive. Markets were hoping the bulk of markdowns had been made in the first half and hoped margins would actually start recovering in the second half, but that is now in doubt. Markets have become more hopeful that interest rates are close to peaking, but any hopes of a pivot are far away.

‘It does make sense to sacrifice margins to make more vehicles,’ Musk told investors and analysts. That shows Musk believes it has more wiggle-room, but that is stoking fears that profitability could remain under pressure in the second half.

Tesla will have to counter the negative impact on margins from price cuts with better scale and efficiency from its factories, which it said already helped limit the impact in the second quarter.

Musk added that lower margins today are OK because he is anticipating its vehicles will ‘have a dramatic valuation increase’ in the ‘not-too-distant future’ – nodding toward Tesla’s Full Self-Driving software that he has previously described as the future of Tesla. Unleashing FSD to the millions of Tesla cars already on the road will dramatically change the game as it shifts Tesla more toward higher-margin services from lower-margin hardware – although Tesla has consistently missed self-imposed targets and has found it more difficult than anticipated to get it to a good enough standard.

The key to unlocking the huge potential behind FSD will come from Tesla’s AI training hardware named Dojo, which it plans to spend around $1 billion on over the next year or so. Notably, Tesla is having to purchase AI hardware from chipmaker NVIDIA to help compliment Dojo. Musk said Tesla would be open to licensing out FSD to other carmakers in the future. Tesla has already cemented its charging connector and Supercharger network as the industry standard and any signs that Tesla can do the same with FSD would be a much bigger catalyst.

Tesla inventories continue to build

Deliveries may be rising but so are inventories. It produced over 13,500 more vehicles than it delivered in the second quarter, adding to the 17,900 build-up we saw in the first. In fact, production has significantly exceeded deliveries for five consecutive quarters.

Higher inventories is another reason investors are spooked that Tesla will need to keep bringing prices down if it wants to clear it and narrow the gap between production and sales.

Tesla warns production could slow in Q3

Tesla warned that third quarter production will be ‘a little bit down’ because of planned summer shutdowns and factory upgrades. Musk said this will ‘probably’ result in a ‘slight decrease’ without providing more details. That may be Tesla looking at its inventory levels and trying to use them to its advantage by continuing to sell what it already has while conducting work on its plants. That could also help inventories unwind in the third quarter.

Importantly, Wall Street is convinced that deliveries can continue to hit new quarterly records in both the third and fourth quarters of 2023. Temporarily reducing production will be fine so long as deliveries keep growing, but any signs that both could decline would be very unwelcome.

Tesla: Are hopes for 2 million deliveries in 2023 fading?

Tesla reiterated its ambition of delivering 1.8 million vehicles in 2023. It can easily achieve that if it can repeat its performance seen in the first half during the second (even if the fourth quarter has to pick up any slack in the third). If successful, that puts Tesla on course to grow deliveries by around 41% from what we saw in 2022. While that level of growth is not to be sniffed at, it does suggest Tesla will miss its 50% annual goal for yet another year.

Still, some investors were optimistic that deliveries could hit as high as 2.0 million vehicles in 2023, which would allow it to hit that 50% growth target, after Musk said there was ‘a shot’ it could hit that figure earlier this year – although this appears less likely in wake of the latest results.

Tesla Cybertruck demand is ‘off the hook’

Plus, hopes that the long-awaited Cybertruck, the first of which rolled-off the production line just this week ahead of a launch later this year following years of delays, can provide new momentum to deliveries in 2023 look optimistic as it is unlikely to be widely available until 2024.

Still, the Cybertruck is likely to be a major new catalyst when sales do take off considering it is the first new model to be seen in years, which is attracting significant interest. ‘Demand is so far off the hook, you can’t even see the hook,’ said Musk.

While drumming-up demand for its electric pickup truck has been easy, we may see the ramp-up of production take longer than it has for previous models due to the amount of new technology being used in the Cybertruck. The model has around 10,000 unique parts and processes!

‘I do want to emphasize that the Cybertruck has a lot of new technology in it, like a lot. It doesn’t look like - it doesn’t look like any other vehicle because it is not like any other vehicle. So -- and the production ramp will move as fast as the slowest and least likely elements of the entire supply chain and internal production,’ said Musk.

The CEO said Tesla is more experienced ramping-up output than it was in the past and that he hopes it is ‘smooth’. Musk said it will deliver its first Cybertrucks in 2023, but said Tesla won’t be producing them in ‘high volume’ until 2024.

Tesla sum-of-parts valuation coming into play

Tesla said the other areas of its business outside making cars, such as its charging network and its energy businesses, ‘all started to become a meaningful contributor to profitability’ in the second quarter. Markets have long paid little attention to the other parts of Tesla’s empire but they are gaining traction, which may result in markets assigning more value to them going forward.

A string of automakers including Ford and General Motors have agreed to adopt Tesla’s charging connector from 2025, and their customers will also gain access to Tesla’s Supercharger network from next year.

As for the energy business, Tesla said it improved margins through greater scale in the quarter, particularly for its dense energy storage Megapack batteries, while its battery-producing factory in Lathrop, California, is also making progress.

‘Megapack continues to show strong demand globally with Lathrop ramping successfully to meet our contracted projects in 2023. As stated last quarter, Megapack margins are in a reasonable place, in line with our target – vehicle target margins,’ said Tesla.

Tesla stock: Conclusion

The bar was high for Tesla ahead of the results considering shares have risen 2.7-fold in value since the start of the year, with a beat and the top and bottom-lines being overshadowed by a more uncertain outlook for the remainder of 2023.

Price cuts are working and fuelling growth in deliveries, but are hurting margins. Tesla has signalled it could introduce more price cuts if necessary in the second half, stoking fears margins may have not bottomed-out in the second quarter as hoped. Tesla said production may be down in the third quarter because of planned upgrades and summer shutdowns, although that is timely considering inventories are continuing to build.

The willingness to sacrifice profitability also heightens the pressure on Tesla’s advancements in AI and developing its self-driving technology, which is already many years behind schedule. A push into higher-margin services, especially ones as game-changing as autonomous vehicles, would transform Tesla’s profitability and business while its other units also have scope to help boost margins.

The selloff today reflects a combination of a pullback from the rally we have seen in 2023 and concerns over the short-term outlook, but the prospects over the longer-term are getting exciting as investors bank it will see new catalysts from AI and self-driving cars, the potential of its charging and energy businesses and, in the nearer-term, the launch of the new Cybertruck and Semi.

Where next for TSLA stock?

Tesla’s meteoric rise this year means it has been the third best performer in the Nasdaq 100 in 2023. That showed expectations were high ahead of the results and it hasn’t taken a lot for some to worry its valuation is too high given the uncertain outlook over the coming months. The stock is down around 3% in premarket trade this morning.

The stock tested the 61.8% retracement yesterday when it climbed to a 10-month high before pulling back in wake of the results. We can see the stock is set to open far below the supportive trendline that has held firm for the past two months. It would need to close above $286.60 for that trendline to remain in play. The $282 it trades at this morning matches the last peak set earlier this month. If the selloff intensifies, there is a risk it could slump back down to $266. The RSI remains on the cusp of overbought territory.

If the slump proves temporary, then the stock still has a job to do to break through the 61.8% retracement at $295, after which the $300 psychological threshold comes into the crosshairs. Piper Sandler raised its price target to $300 from $280 in wake of the results, suggesting it sees today’s pullback as a possible buying opportunity.

Nasdaq 100 analysis: Where next?

Tesla is the fifth largest member of the Nasdaq 100 and carries a weight of over 4.5%, meaning its performance has an influence on the index.

Futures are pointing sharply lower this morning. We can see that yesterday the index tested the top end of the rising channel that has been in play over the past five months before pulling back and closing down for the day. We can see the mid-range of the channel has been providing support since May, suggesting it could fall back toward the 78.6% retracement at 15,300 if it comes under pressure. Any slip below here brings the bottom of the rising channel back into play. The RSI remains deep in overbought territory.

The rally this year has sent the Nasdaq 100 to its highest level since early 2022. It needs to break above the rising channel but remains on course to keep climbing even if it holds. But, assuming it does, risks appear more geared toward the downside over the coming days.

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