As we await the release of Tesla’s Q2 earnings results, the word on everyone’s lips – and the forefront of Wall Street analysts’ minds – is “margins”. With the report due after Wednesday’s market close, all eyes are on Tesla’s gross margin levels, a key determinant of the company’s financial health.
When considering its league of electric vehicles, Tesla has outpaced its competition with remarkably high margins, peaking at almost 30% in Q1 of 2022. This level was more than double the profitability margins of competitors such as Ford and General Motors.
However, Tesla’s margins dipped to a shade under 20% following a series of strategic price cuts aimed at spurring demand. While the move did lead to a demand surge, resulting in a recorded delivery of 466,000 vehicles in Q2, investors are curious about the margin compromise made to facilitate these price cuts.
According to Wall Street’s consensus, Tesla is projected to generate a revenue of $24.5 billion for the quarter, alongside earnings per share of $0.82. But what everyone wants to know is – at what cost? What’s the level of Tesla’s profit margin sacrificed to sell such a vast number of vehicles?
Analyst Dan Ives predicts that Tesla’s gross margin may fall to 17.5% in the second quarter, the lowest since 2019. However, he remains optimistic about the future, forecasting a rebound back to 20% heading into 2024 due to sustained demand. As per Ives, Tesla’s strategic move of aggressive price cuts was a “near-term pain for long-term gain,” bolstering its customer base despite the short-term dent in margins.
Ives also highlights the potential refresh of Model 3 and Y, along with the Cybertruck rollout, as strong catalysts for retaining robust demand. He maintains an “Outperform” rating on Tesla and a $300 price target, signaling a potential upside of about 4% from current levels.
On the other hand, JPMorgan takes a less bullish stance, attributing the firm’s strong Q2 deliveries to the already high price of Tesla’s shares. According to JPMorgan analyst Ryan Brinkman, the gains from Tesla’s solid deliveries are already factored into the stock price, while Wall Street’s estimates have taken a hit.
The consensus at JPMorgan is that Tesla’s share price is currently overvalued. The bank has thus assigned an “Underweight” rating and a $120 price target to the stock, indicating a potential downside of 58% from current levels.
Tesla’s strategic price cuts clearly have a significant bearing on its long-term earnings power and, consequently, its stock price. As the company reveals its Q2 earnings, investors and entrepreneurs should keep a close watch on how Tesla’s margin story unfolds – it’s sure to be a key indicator of what the future holds.