Tesla’s Q1 profit margins squeezed by price cuts, missing estimates

Lower-than-anticipated profits were reported by Tesla Inc. for the first quarter, attributable to a string of price reductions aimed at boosting demand, but which had the effect of compressing margins. Despite an increase in revenue by 24% to $23.33 billion during the quarter, profits, excluding certain items, declined to 85 cents per share, while free cash flow dropped to a two-year low of $441 million.

Analysts had predicted that free cash flow would reach $3.24 billion during the quarter, making investors nervous about the company’s aggressive pricing strategy. Tesla has been cutting prices to maintain its leading market position.

In the quarter, Tesla’s operating margin fell to 11.4% from the previous quarter’s 16% and last year’s 19.2%. The company chose not to disclose the breakdown of its automotive profit margin, which was over 30% at the beginning of 2022. Tesla’s profitability is unique among EV companies and is closely monitored by investors.

As per the comments made by Gene Munster, managing partner at Deepwater Asset Management, Tesla is facing a difficult phase with an increase in inventory. Munster also stated that although the company is managing to keep things under control, investors are hoping for an improvement in these trends.

Regarding its recent price reductions, Tesla attempted to alleviate concerns by stating that its operating margins had only fallen “at a manageable rate.” Additionally, the company attributed the decline in profits to increased vehicle deliveries and higher raw material costs.

Its previous guidance for an average annual growth rate of 50% over multiple years is expected to be met, according to the EV maker. Additionally, it has confirmed its ability to deliver around 1.8 million vehicles this year. The company’s current production lineup includes the Model S, X, 3, and Y.

Throughout the quarter, the automobile manufacturer manufactured a total of 440,808 cars and successfully delivered 422,875 vehicles. However, this resulted in a surplus inventory of approximately 18,000 units. In a recent shareholder statement, the company expressed confidence in its ability to maintain one of the industry’s highest operating margins.

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