Tesla renews push for 'affordable' vehicles after missing earnings expectations

Tesla on Tuesday announced a renewed push for making “affordable” vehicles and company-wide cost-cutting measures as it missed first-quarter earnings expectations.

The Texas-based electric vehicle maker, which is struggling with weak sales and increasing competition in the Chinese market, said it aims to introduce “new models” before the second half of next year.

The car maker said it is focused on “profitable growth” by using existing factories and production lines to introduce new, cheaper products.

“We … undertook a cost-cutting exercise to increase operational efficiency … also remain committed to companywide cost reduction, including reducing Cogs [cost of goods sold] per vehicle,” Tesla said.

It was referring to the total material costs of all parts associated with making a final product.

Industry analysts welcomed the new strategy and said that the move towards cheaper products could work in Tesla's favour and help it to beat out the intensifying competition in the market.

Elon Musk, chief executive of Tesla. Reuters

“This means the company may just be able to use its gigantic production capacity more efficiently while maintaining the original proposal of its higher-end models,” Thomas Monteiro, senior analyst at Investing.com, told The National.

“It's a promising sign for the company that [chief executive] Elon [Musk] felt compelled to change its direction amid the myriad of pressures.”

Why Tesla is falling short of analysts’ expectations

Tesla reported a 55 per cent yearly drop in March quarter net profit to more than $1.1 billion. It was 86 per cent down on a quarterly basis.

Revenue during the January-March period dropped 9 per cent to nearly $21.3 billion, missing analysts’ expectations of $22.2 billion.

It was the third time in a row Tesla has missed revenue guidance since the second quarter of 2019, and the seventh straight quarter the company reported $20 billion or more in sales.

Earnings per share stood at 45 cents compared to the expected 51 cents.

The company's operating income decreased by 56 per cent yearly to nearly $1.2 billion in the last quarter while operating expenses surged 37 per cent to more than $2.5 billion.

Tesla said operating income was mainly affected by factors including reduced average selling price for vehicles, an increase in artificial intelligence and research, and a drop in vehicle deliveries, in addition to the cost of the Cybertruck production ramp.

“It's a bittersweet report for Tesla bulls as, on the one hand, the EV giant missed financial expectations … on the other hand, Elon finally presented investors with a feasible plan to turn things around in the key markets,” Mr Monteiro said.

“Amid the current price war, particularly in China – and with the prospects of the company venturing into the Indian market – the word 'affordable' resonated as music to the ears of shareholders.”

In a letter to stakeholders, Tesla said it had experienced “numerous challenges” in the March quarter, including the Red Sea conflict, an arson attack at its Berlin factory and the gradual ramp of the updated Model 3.

Tesla: One of the worst performers in the S&P index

Tesla's stock is one of the worst performers in the S&P 500 index, which has jumped nearly 7 per cent since the start of the year.

Its shares closed 1.8 per cent up at $144.68 on Tuesday, giving the company a market value of $453.35 billion.

But after the earnings announcement and disclosure of new plans, the stock jumped 9.2 per cent in after-market hours to trade at $157.99.

The company's shares have dropped nearly 42 per cent since the start of the year.

Industry experts are not bullish about the company’s growth prospects, prompting them to adjust its future stock price range downwards.

This month the car maker announced plans to cut its workforce by more than 10 per cent.

Mr Musk said the move would help the company to become “lean, innovative and hungry for the next growth phase cycle”.

The company also reported a nearly 8.5 per cent annual drop in its March quarter deliveries.

Visitors check a Tesla Model 3 car next to a Model Y displayed at a showroom in Beijing. Reuters

Tesla, which went public in 2010, said its cash, cash equivalents and investments “decreased sequentially by $2.2 billion to $26.9 billion” in the first quarter.

It was a result of negative free cash flow of $2.5 billion, driven by an inventory increase of $2.7 billion and an AI infrastructure capital expenditure of $1 billion in the first quarter.

Why is Tesla pessimistic about 2024?

Tesla said that this year, its vehicle volume growth rate may be “notably lower” than that achieved in 2023, as its teams work on the launch of the next generation of vehicles and other products.

It said its new vehicles, including cheaper models, will use a next-generation platform as well as its current platforms.

This will enable the company to “prudently grow vehicle volumes in a more capex-efficient manner during uncertain times”.

“This would help us fully utilise our current expected maximum capacity of close to three million vehicles, enabling more than 50 per cent growth over 2023 production before investing in new manufacturing lines,” Tesla said.

A Tesla Cybertruck during a test drive in Los Angeles, California. All photos: Bloomberg
The Cybertruck announces Tesla's entry into the lucrative and highly competitive pickup market in the US
The electric vehicle has a range of about 510km, and accelerates from 0 to 100kph in just 2.6 seconds
The vehicle's stainless steel body is bullet proof
The Cybertruck has a fully self-driving capability with autopilot
About 2,000 of the space-age vehicles rolled off the production line in late November 2023
The interior of the Tesla Cybertruck

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