(News Bulletin 247) – The car manufacturer specializing in electrics saw its margins melt in the second quarter due to price cuts. If profits turned out to be higher than expected, the company’s management did not rule out further price cuts which could further reduce its profitability.

Will Tesla soon become less profitable in terms of margin than Renault? The question is a bit provocative but given the fall in the operational profitability of the manufacturer of the Model 3 and Model S, it does not seem so absurd.

The American specialist in electric vehicles unveiled its second quarter results on Wednesday evening, with sales up 47% to 24.93 billion dollars, driven by the increase in deliveries (+83% over the period).

Since the end of 2022, Tesla has initiated a wave of price reductions on its flagship models in China then in the United States and Europe, so as to inflate its volumes and meet its objective of growth in deliveries of around 50% per year.

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This ultra-aggressive strategy inevitably translates into a pronounced decline in profitability. The operating margin thus fell from 14.6% in the second quarter of 2022 to 9.6% over the same period of 2023. In comparison, Renault is aiming for an operating margin of between 7% and 8% this year, and therefore not so far from Tesla. And we are not talking about Stellantis, whose current operating profitability should still be close to 13% in the first half of 2023, according to forecasts.

The gross margin, a highly watched market data, rose from 25% to 18.2% in the second quarter.

Confirmed delivery target

Nevertheless on both revenue and earnings per share, Tesla exceeded expectations. According to a Refinitiv consensus cited by CNBC, analysts were expecting revenue of $24.47 billion, compared to $24.93 billion, therefore, published by the group. Adjusted earnings per share were expected at 82 cents, but Tesla generated earnings per share of 91 cents. And the company also confirmed its target of 1.8 million vehicles delivered this year.

Yet Wall Street is flu, the Tesla title falling 3% in pre-opening trade on Thursday. The stock initially reacted little in post-closing trading after the release of these results. The title then unscrewed due to comments provided by the leaders of the group including Elon Musk.

As explains it on Twitter Gary Blackchief investment officer of The Future Fund, executives said vehicle production would be down slightly in the third quarter due to modernizations and factory upgrades, as the market expected output to rise to 2,000 to 3,000 vehicles from the second quarter.

Above all, the management of Tesa has not ruled out further price cuts for its models, explaining that they would depend on a potential increase in interest rates, so that households borrowing to pay for a Tesla do not see their monthly payments increase too much. Which suggests that Tesla’s margins could shrink further in the coming months.

Autonomy at the heart of the stock market reactor

“The short-term variations in gross margin and profitability are really minor compared to the long-term situation. Autonomy will make all these figures ridiculous”, minimized in front of analysts Elon Musk, according to remarks reported by CNBC.

A large part of investors believe, it is true, that it is Tesla’s autonomy technologies that constitute the heart of the group’s value, with in particular its software and the imminent arrival of robotaxis.

“Fundamentally, when it comes to Tesla, traders need to look beyond the story of Tesla’s margins, it’s more about the autonomous system and the vast amount of data in it,” said Zaye Capital’s Naeem Aslam.

Elon Musk had also declared during his visit to France at the VivaTech show in June that Tesla’s main stock market driver remained autonomy. “The valuations are sometimes strange. (…) I think that the value of the company depends above all on the autonomy”, he estimated.

With Tesla’s stock market rebound of 136% since the start of the year, the company currently has a valuation of 930 billion dollars, more than those of GM, Ford, Toyota, Nissan, Mercedes, Porsche, Volkswagen, BMW, Renault and Stellantis combined.