Share your thoughts on our News & Insights section. Complete our survey to help us improve.

Share research

Tesla - price cuts dent profits

Tesla's revenue rose 47% to $24.9bn, mostly driven by automotive revenue.

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Prices delayed by at least 15 minutes

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

Tesla's revenue rose 47% to $24.9bn, mostly driven by automotive revenue. A 21% increase in operating costs contributed to a 3% fall in operating profit to $2.4bn. Tesla cut its vehicle prices in the period, which helped underpin demand but also dented profitability too.

The group delivered 466,140 vehicles, an increase of 83%, while production rose 86%.

Tesla generated free cash flow of $1.0bn.

Looking ahead, the group said it's focussed on reducing costs and expects to deliver 1.8m cars this year.

Tesla shares fell 4.2% in after-hours trading.

View the latest Tesla share price and how to deal

Our view

The market wasn't overly enthused by recent results. There are jitters about profitability. Tesla's operating margins have been disappointing, stemming from its decision to cut prices aggressively. This has been done to encourage sales as consumers face difficult economic conditions. Exactly where margins will settle is still a source of debate and largely depends on both pricing, and the group's ability to improve production efficiency.

Getting prices back into healthier territory is likely to be a tough ask while wider conditions remain difficult. At the same time, competition, especially in China, is also incredibly tough. EVs from formidable rivals like BYD are available at considerably lower price points than Tesla, which could see revenue growth stall in this important growth region.

Traditional car makers are throwing billions at producing their own electric vehicles too. Tracking the strength of Tesla's demand is important because Tesla's gigantic Gigafactories are expensive to ramp up, but once their costs have been covered, a greater proportion of each car sold drops through to profits. If volumes were to drop, the opposite would be true.

Software is a potential outlet for extra growth - the group's self-driving technology is already delivered to existing vehicles through wireless updates. This lends itself well to software subscription programmes, which would help pad profits and squeeze more out of cars already sold.

Another potential avenue is insurance. It's still early days but Tesla is already seeing green shoots. Driver data is used to set premiums. This creates an instant feedback loop, ultimately encouraging safer driving. Tesla is responsible for fewer accident costs and customers save money. Further afield are aspirations for a fully self-driving robotaxi.

Tesla bulls are of the mind that it doesn't matter if initial margins achieved on cars is low, because these types of extras mean the potential revenue per-vehicle in the long-run par surpasses the initial selling cost. We happen to like this as a theory but would like some hardened proof of the adoption of these services at scale.

The final word should go to governance risk. Musk is famously unconventional, as great innovators often are. But this has now landed him in trouble. He's faced court on fraud charges because of old tweets. Tesla investors need to be aware there could be further ups and downs in their investment caused by Musk's behaviour.

Tesla has an excellent product, and if production can be ramped up at pace, the horizon for more attractive per-unit costs looks rosy. There's no denying Tesla's remaining appeal, but the market is unlikely to fully replenish the group's valuation until margins are pointing north.

Environmental, social and governance (ESG) risk

Most of the auto industry falls into the medium-risk category in terms of ESG. Product governance, particularly around safety, and carbon emissions from products and services are key risk drivers. Business ethics, labour relations and direct carbon emissions are also contributors to ESG risk.

According to Sustainalytics, Tesla's management of ESG risks is average. It is recognised as working towards lowering carbon emissions by reducing the prevalence of traditional car engines. However, its product governance and human capital management are deemed problematic. Issues include safety concerns around its autopilot technology and the management of its workforce. Governance concerns also include Elon Musk's past tweets which impacted Tesla's share price.

Tesla key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Latest from Share research
Weekly newsletter
Sign up for editors choice. The week's top investment stories, free in your inbox every Saturday.
Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

Our content review process
The aim of Hargreaves Lansdown's financial content review process is to ensure accuracy, clarity, and comprehensiveness of all published materials
Article history
Published: 20th July 2023