Electric vehicle manufacturer Tesla reported a sizable 44% decline in third quarter profits compared to last year, as the company’s strategy of repeatedly slashing vehicle prices put significant pressure on margins. Tesla’s net income fell to $1.85 billion in Q3 2022, down from $3.29 billion in Q3 2021.
Tesla Q3 Earnings Results
For the third quarter of 2022, Tesla posted total revenue of $23.35 billion, a 9% increase versus the same period last year. The rise in revenue was attributed to higher vehicle deliveries and continued growth across Tesla’s energy and services businesses. However, Wall Street analysts had forecasted slightly higher revenue of $24.1 billion.
On the bottom line, Tesla’s earnings per share came in at $1.05, falling short of analyst estimates of $1.15. The company’s gross profit margin dropped substantially to 17.9% in Q3 2022, compared to a robust 25.1% gross margin in Q3 2021. Margins also declined sequentially, as Tesla had reported a 18.2% margin in the second quarter of this year. In addition, you can also read an article on- Elon Musk Cuts Tesla Model 3 and Model Y Prices to Boost Sales
Following the earnings results, Tesla’s stock closed down 4.78% on Wednesday October 19th ahead of the report being released. However, shares rebounded 1.5% higher in after-hours trading once the full details were announced.
Impacts of Price Cuts on Tesla’s Margins
In its shareholder letter, Tesla attributed the sharp contraction in margins primarily to the company’s move to reduce pricing across its lineup of luxury and mass market electric vehicles.
In the third quarter, Tesla cut prices by as much as $18,500 on the higher-end Model S and Model X. The automaker also continued offering discounts and incentives on its top-selling Model 3 sedan and Model Y crossover SUV. These price reductions have been ongoing over the last several quarters.
According to Tesla, increasing operating expenses related to research and development projects like the upcoming Cybertruck also weighed on net income. Furthermore, costs associated with idling its main U.S. factory in Fremont, California for upgrades and preparation for ramping production put downward pressure on profitability. Negative foreign exchange impacts rounds out the major factors impacting earnings.
Positives for Tesla in Q3
Despite the margin and earnings declines, Tesla did highlight some positives in its third quarter results. The company saw strong growth in total vehicle deliveries, lower per-unit production costs, and an expected boost from the new U.S. Inflation Reduction Act tax credits.
Tesla also pointed to higher gross margins and profits in its energy generation and storage business. And revenue from the sale of regulatory credits nearly doubled year-over-year, reaching $554 million.
Cybertruck and Production Outlook
As Tesla prepares for the upcoming launch of its long-delayed Cybertruck model in 2023, the company maintained its ambitious guidance for total deliveries this year. Tesla still expects to deliver around 1.8 million electric vehicles globally in 2022.
However, Tesla’s total production and deliveries fell nearly 7% quarter-over-quarter in Q3 as the automaker idled its factories. With Cybertruck not slated to begin initial production until early next year, Tesla will need to dramatically ramp output in Q4 or further stimulate demand through discounts to hit its delivery target. If you want you can also read- 5 Most Essential Android Auto Apps for Every Driver
Analysts Debate Tesla’s Demand Trends
The depth of price cuts offered by Tesla has sparked an ongoing debate among industry watchers regarding demand trends for the automaker’s vehicles. Some analysts view the discounts as a warning sign that demand is beginning to soften, especially in China which has been a major growth engine.
Others argue the price cuts are a tactical move aimed at boosting already strong demand amid a wider economic slowdown. Tesla does appear sensitive to just how deep it can cut prices before significantly impacting margins.
You May Find Interest: Top 10 Fastest Cars of 2023
Tesla’s Future Profitability in Focus
As Tesla continues discounted pricing strategies to support sales volumes and defend market share, its ability to restore profit margins to previous peaks will remain in focus. While near-term uncertainty exists, Tesla expects strong profitability over the long run as new factories ramp production and technologies like Cybertruck, Optimus robots, and FSD software scale up.