Nasdaq 100 Analysis: Tesla stock plunges as price cuts hit margins

Tesla stock crashes

Tesla shares are down 7.6% in extended hours trade at $167, hitting their lowest level in over a month.

That is bringing the March low back into play, with investors hoping that some support will emerge between the intraday low of $164 and the open of $167.50. Notably, that is aligned with the trough we saw last November. A drop below here could be significant and prompt a sharper selloff.

Notably, we have seen a cup and handle pattern emerge following a sweeping ‘U’ shape between November and February, followed by a handle represented by the downward trend since then, supported by the fact trading volumes have also declined since we moved from the cup to handle. This is generally regarded as a bullish formation and suggests the upper end of the handle, currently at around the $200 mark, is a key level to watch as a move above here could lead to a potential breakout. However, with shares currently falling, investors may be more focused on whether we will see a slip below the $156 mark that would disrupt the handle, making this another key downside level to watch.

A number of brokers cut their price target on the stock in wake of its first quarter results, including Citigroup to $175 from $192, TD Cowen to $150 from $170, Cannacord Genuity to $257 from $275 and RBC to $212 from $217.

Tesla meets expectations

Revenue rose 24% year-on-year in the first quarter to $23.3 billion and met expectations while adjusted EPS plunged 21% to $0.85 to narrowly miss the $0.86 forecast.

Tesla doubles-down on price cuts

Tesla has doubled-down on its plans to cut prices of its electric vehicles in order to drive demand and grow volumes as the company wields its superior margin over rivals, injecting fears that investors will need to stomach lower profits over the near-term, or possibly longer.

The company has slashed prices on several occasions across multiple geographies in 2023, having made its sixth cut in the US just hours before the results were released yesterday. But, with both production and deliveries only nudging up slightly from the fourth quarter, Tesla is now preparing to make more reductions to encourage more consumers to go electric and ensure they pick Tesla over the growing number of rival models hitting the market.

Notably, inventory levels hit a record high in the first quarter of $14.4 billion, cementing the idea that deliveries are struggling to keep up with production as Tesla continues to ramp-up output at new factories in the US and Europe. Those factories are not yet at capacity and Tesla has failed to ship all of its production to customers over the last year, demonstrating that more price cuts will be necessary to keep shifting its growing number of vehicles.

Tesla said orders are now outstripping production to suggest the recent price cuts are starting to improve demand. However, investors will be cautious considering CEO Elon Musk declined to reiterate hopes that it could shift up to 2 million cars this year and stuck by the formal guidance for 1.8 million. That means Tesla expects to grow deliveries by 37% in 2023, way below its 50% target.

Tesla margins contract to tightest level in years

Its price-cutting strategy is significantly hurting profitability. The fact Tesla refused to reveal its automotive gross margin as usual spooked markets and its overall gross margin of 19.3% was the lowest on record since late 2019 and fell far short of the 21.2% pencilled-in by Wall Street. Meanwhile, its operating margin contracted to 11.4% in the first quarter, down from 16% in the previous quarter and over 19% the year before, representing its tightest margin in almost two years.

‘In the current macroeconomic environment, we see this year as a unique opportunity for Tesla. As many carmakers are working through challenges with the unit economics of their EV programs, we aim to leverage our position as a cost leader,’ Tesla said.

Tesla has decided to wield its superior margin as a weapon over rivals rather than protect it. For context, operating margins at group one automakers, which includes the likes of BMW, Volkswagen, Ford, Chevrolet and other major players, has been sliding since the start of 2023 and currently sits at just 6.7%, according to data from macrotrends. While Tesla’s lead on margins will close, it said it expects profitability to remain ahead of its traditional rivals.

‘Although we implemented price reductions on many vehicle models across regions in the first quarter, our operating margins reduced at a manageable rate. We expect ongoing cost reduction of our vehicles, including improved production efficiency at our newest factories and lower logistics costs, and remain focused on operating leverage as we scale,’ Tesla said.

Still, Tesla’s valuation has long been propped up by a combination of rapid growth twinned with impressive profitability, but this has now been thrown into doubt.

Pressure rises on Tesla to introduce self-driving technology

Tesla argued that it can sacrifice margins now and reap rewards later. It hopes selling as many cars as possible now will pay off down the line when it introduces its long-awaited full self-driving technology.

‘It’s better to shift a large number of cars at a lower margin and harvest that margin in the future as we perfect autonomy,’ Musk told analysts.

Musk cautiously said that Tesla could launch its full self-driving technology this year, which would help restore confidence that profitability will begin to bounce back.

‘I hesitate to say this but I think we’ll do it this year,’ Musk said on the conference call. That should be taken with a pinch of salt considering its self-driving tech is years behind schedule and Musk has warned that developing the system has proven much harder than he originally thought.

Take advantage of extended hours trading

Tesla released earnings after markets closed and most traders must wait until they reopen the before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and post-market sessions.

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