Tesla Inc. CEO Elon Musk announced on Wednesday that the electric vehicle maker would prioritize sales growth over profitability in a weak economy. The move follows a price war that Musk initiated at the end of last year, with Tesla aggressively slashing prices in markets including the United States and China to spur demand and fend off rising competition.
Tesla reported its lowest quarterly gross margin in two years, missing market estimates, and its shares fell by 6% in after-hours trading. However, Musk defended the decision to prioritize sales growth, stating that “it’s better to shift a large number of cars at lower margin and harvest that margin in the future as we perfect autonomy.” He added that the EV maker’s orders still exceeded production, although he declined to reaffirm his earlier goal of achieving 2 million vehicle deliveries this year, standing by the company’s official target of 1.8 million deliveries.
However, analysts have expressed concerns over Tesla’s worrying China sales figures, which indicate that demand for its vehicles is slowing more than expected in the face of rising competition from local EV companies. Jesse Cohen, the senior analyst at Investing.com, noted that Tesla may need to cut prices further to remain competitive, especially in China, even as its new factories in Berlin and Texas churn out cars.
Tesla also reported a record inventory of $14.38 billion in the first quarter, up from $6.69 billion a year earlier, and burned $154 million in cash during the quarter. Musk announced plans in 2020 to produce a new battery cell to halve the cost of the most expensive part of an EV, but the company has been struggling to ramp up production for those cells. Tesla aims to cut assembly costs by half but did not specify when it will debut its long-awaited affordable electric vehicles.
Despite these challenges, Tesla said in a statement that it still believes its operating margin will remain the highest among big carmakers. The company reported a total gross margin of 19.3%, short of market expectations of 22.4%, and did not report its automotive gross margin, a figure closely watched by investors. Musk cited the weak economy as making it hard to provide a margin outlook.
Tesla’s net profit fell by nearly a quarter to $2.51 billion from a year earlier, hurt by higher raw materials, logistics, and warranty costs as well as the production ramp-up of its 4680 battery cells. However, income adjusted for one-time items and revenue was in line with estimates from Refinitiv.
Looking ahead, Tesla fans have long-awaited a refresh of the company’s aging model lineup, with Musk announcing plans to start production of the Cybertruck this summer and expected delivery event in the third quarter. The company aims to cut assembly costs by half but did not specify when it will debut its long-awaited affordable electric vehicles.