Tesla set to fall on disappointing earnings, price cuts

Tesla’s shares may tumble by more than 7% today (Thursday, April 20), assuming yesterday’s post-market move carries over into today’s cash session as well.

The EV automaker reported its first-quarter financial results after the US stock market closed on Wednesday.

The main takeaway from Tesla’s announcement: the EV maker appears willing to let profit margins slide in order to expand volume and market share.

The disappointing news prompted Tesla’s shares to fall by as much as 7.9% in Wednesday’s post-market session.

That tumble could also weigh on other consumer discretionary stocks (from Amazon to Nike) in Thursday’s cash session as well.

 

How did Tesla’s earnings fare in Q1?

Here are some key numbers that were reported overnight:

• Revenue: US$23.3B (+24% year-on-year) vs. forecasted S$23.35B
   
• Earnings per share (EPS): $0.85 vs. forecasted $0.86
   
• Gross margin: 19.3% vs. forecasted 21.2%

Markets clearly fixated on that last bullet point: the margin compression into sub-20% levels.

That prompted a selloff in Tesla’s shares, along with comments from Elon Musk about potentially even more price cuts on vehicles in light of a 29% price cut to the Model Y SUV – best-selling vehicle -  since mid-January.

 

What did Musk say to scare shareholders?

In the earnings call with analysts, Musk said that “pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin”.

In other words, Tesla expects thinning profits so as to increase, or at least protect, its market share in the electric vehicles space.

To be clear, Tesla’s gross margin is still growing by double digits. That’s much higher than General Motors’s margin of 6.6%, and also far outpacing Ford’s 4% in 2022.

Still, shareholders didn’t like the sound of that, which was enough to send the stock tumbling as markets failed to justify Tesla’s 46.6% year-to-date climb and needed to revalue the stock in light of the company’s outlook for slimmer profitability.

 

Where to next for Tesla’s share price?

Looking at the price charts, a 7% drop when US markets reopen for Thursday’s trading session would send Tesla’s stocks towards its mid-March low in sub-$168 territory.

That would also mark a downside breakout from its triangle formation since February.

Continued selling pressure may see Tesla bears test that mid-March low at 163.92 for near-term support.

However, once the dust settles, Tesla’s stocks may recover alongside risk-taking sentiment, provided other consumer discretionary stocks post better-than-expected earnings in the weeks ahead, especially leading up to the Fed’s upcoming policy decision in early May.

Should the Fed signal that it’s ready to pause its rate hikes, with perhaps an eye on potential rate cuts later this year to offset a possible US recession, that may be the fundamental cue for US stocks to keep charging higher.