Blogs -Tesla’s Margins: How Low Will They Go?

Tesla’s Margins: How Low Will They Go?


August 31, 2023

author

Knox Ridley

Portfolio Manager

As the I/O fund looks to position itself for the remainder of 2023. Fundamentally,  we’re avoiding ‘Crocodile Jaw’ situations where the stock price is going up but fundamentals are decelerating. This is one of the reasons we greatly reduced our Tesla position for a ~60% gain. 

Tesla stock has rallied through most of 2023 during a time when consensus was estimating sales to grow +23% y/y but earnings to decline 15%. The main driver behind the decline in earnings estimates is that Tesla has decided to lower prices to increase volumes at the expense of margins.

Starting in Q322 through Q223, operating margins have declined from 17.2% to 9.6%. Initially, Tesla cited making sure certain models qualified for the EV tax credit and later higher interest rates as the primary reasons for lowering prices.

Higher interest rates are effectively a price hike that increases monthly payments for those who finance their purchases. Tesla recently announced 84 month financing to lower monthly payments. Reducing the sales prices also helps lower monthly payments. Meanwhile, increasing EV inventory at dealerships and discounting at an industry level are likely another contributing factor.

However, the challenge of higher interest rates is not unique to Tesla. All OEMs face the same obstacles. Below are reported operating margins for the major global OEMs from Q322 through Q223. Either they were relatively stable for the Germans and Koreans or bottomed in Q123 and have improved in the case of the Japanese.

Despite this, Tesla is the one OEM whose operating margins have continued to decline.

OEM operating margins graph

 Source: Y-Charts

It’s Not Just Macro

This highlights that there are other forces at work beyond the macro. We believe it points to Tesla implementing a pricing strategy to gain market share. Taking into consideration the competitive factors at work will help in trying to decipher Tesla’s pricing strategy and how that will impact operating margins for the remainder of 2023. It is through this competitive analysis framework that we will try to parameterize how low Tesla operating margins can go.

For this analysis, we chose to focus on reported group operating margins. Although this metric includes non-EV businesses, we believe it’s the most objective and public measure to provide an apples-to-apples comparison across the auto landscape globally.

At the end of Q422, Tesla's operating margin was 16%. To provide some context, at the time this was greater than the German OEMs. Tesla had firmly positioned itself in the premium segment.

The Germans have been dealing with their own challenges integrating EV offerings, and have been trying to catch-up with Tesla. Perhaps sensing its competitive moat within the premium market was fortified, this gave Tesla an impetus to lower prices further to attack the mass market segment. In Q223, Tesla’s operating margins declined to 9.6% after enacting a series of price cuts.

Currently, this is how Tesla’s operating margins compare to its main competitors. As can be seen below, Tesla’s Q223 reported operating margins are below those of most of the major US, German, Japanese and Korean OEMs.

OEM operating margins

Source: Y-Charts

How Low Can Operating Margins Go?

Strategically, Tesla will likely continue to lower prices to increase its leading EV market share to stave off competition which will intensify over the next few years. Tesla’s electric market share peaked at 78% in 2018 and stood at 62% in 2022.   By 2026, Merrill Lynch estimates it will decline to 18%

2026 EV market share estimates

Source: Merrill Lynch

In the most recent Q2 call, both Elon Musk and Zachary Kirkhorn, former CFO, signaled Tesla‘s focus will continue to be on volumes.

Musk 

“So, I think it’s sort of, it would be -- I think it -- it does make sense to sacrifice margins in favor of making more vehicles because we think in the not too distant future, they will have a dramatic valuation increase.”

Kirkhorn

“We continue to work towards our goals of maximizing volumes on our vehicle business … in a way that generates the capital to continue our pace of R&D and capital investments.”

Through this competitive analysis framework, we believe Tesla’s Q3 operating margins can decline to a level between Honda and VW. Taking the midpoint, operating margins may go to 7.8% compared to most recent 9.6%. If operating margins were to reach a level closer to -- or below GM perhaps --- that could be sign they’re close to the bottom. This highlights the broader concern for investors in that Tesla has not provided any parameters nor guidance to assess how low margins may go. It is why we significantly reduced our position.

We have two base cases.

Base Case 1 is that Q3 operating margins are between Honda’s and VW at 7.8%.

Base Case 2 is more bearish in that they reach GM’s at 6.2%. For now, we believe Base Case 1 is the most likely. Consensus opm estimates are higher and consensus will have to revise down their Q3 and Q4 operating profit estimates if either case materializes.

tesla operating margins

In the medium term, there are reasons to be optimistic that Tesla’s strategic moves may bear fruit and its margins will rebound. In addition to lowering prices, the move from the CSS to Tesla’s NACS EV charging standard may help Tesla take market share away from those who have not yet announced plans to shift to NACS. Namely, Toyota and Honda who together have 25% automotive market share in the US. Meanwhile, Tesla deserves credit for maintaining its premium brand perception despite lowering prices. For now, the Tesla brand is almost synonymous with EVs. The refreshed Model 3  may further strengthen Tesla’s position in the minds of consumers.

Sign up for I/O Fund's free newsletter with gains of up to 221% - Click here

Tesla’s Price Action:

We continue to see a bifurcated market, which has been one of the leading themes in 2023. Some markets/stocks have likely put in tops, while big tech, especially those names perceived to be involved in AI, suggest another high is likely. Tesla falls into this camp, where one more high is still on the table before we have to deal with a bout of extended volatility. You can read more about our broad market analysis here.

The question for Tesla investors is whether the January low was a major low, or do we have one push lower before a major low is struck? There are some stocks, like NVDA and NFLX, for example, that will likely see similar bouts of volatility in the coming months, yet they have a high probability of making a lower high. Tesla could fall into this category.

There are two large counts that I’m tracking based on the current price information that account for these scenarios.

  • Blue – The big picture here has TSLA making a higher low in the coming period of volatility. The key to this count will be a large pullback that both holds $147 and is a 3-wave retrace. If this happens, it will be setting up a great buying opportunity.

    On a shorter-time horizon, TSLA has ended the topping region from $300 - $325. We could see one more swing into the $325 region. This will be very strong resistance to monitor, if we get another push. The August low around $213 will be very important. If we break below this level, then it is likely the top is in.
  • Red – on a shorter time horizon, the above analysis applies to both counts. Where this one differs will be in the pattern of the larger retrace.  Instead of a 3-wave retrace, it will have to be a 5-wave pattern that breaks below $147. If this happens, the odds will be quite high that we will see one more low before a major buying opportunity presents itself.
tesla chart

If you own Tesla stock, or are looking to own Tesla, we encourage you to attend our weekly premium webinars, held every Thursday at 4:30 pm EST. This week, we will discuss Tesla, as well as a handful of other AI plays – what our targets are, where we plan to buy as well as take gains.

Recommended Readings:

head bg

Get a bonus for subscription!

Subscribe to our free weekly stock
analysis and receive the "AI Stock: 5
Things Nobody is Telling you" brochure
for free.

More To Explore

Newsletter

Aerial view of Tesla's new Model Y Juniper parked in lines. Courtesy of Tesla, Inc.

Tesla Stock Faces Recalibration of Growth Expectations

Tesla’s stock is now facing a recalibration of expectations after Q1’s delivery report missed by a wide margin. Q1’s analyst consensus has gone from $25.98B at the start of the year to $23.97B in earl

April 17, 2025
The bond market could break the stock market in 2025, as explored in ‘The Fed Can’t Save This One’ article.

The Fed Can’t Save This One: Why Bonds May Break the Stock Market in 2025

In early 2025, as markets rallied to new highs, we warned that divergence across key sectors signaled a looming correction. Now, with all major indexes in a technical bear market and bond market dysfu

April 11, 2025
Silhouette illustration of Larry Ellison, Oracle's CTO and executive chairman.

Oracle Stock Outlook: Revenue Could Double by FY2029, yet Targets Seem Lofty

Late in 2024, Oracle outlined an ambitious plan to nearly double its revenue by fiscal 2029, hinging on long-term growth in enterprise AI and cloud spending. Oracle sets itself apart from its hypersca

April 04, 2025
I/O Fund reports a 210% cumulative return, surpassing top tech ETFs and institutional portfolios with a 35% gain in 2024. Source: YCharts and InsiderMonkey.

I/O Fund Reports 210% Cumulative Return -- Ranking Above Wall Street's Best

In 2024, I/O Fund posted a 35% return, significantly outperforming popular tech ETFs, which recorded an 8% return over the same period. On a cumulative basis, the results translate to a remarkable 219

March 31, 2025
Chart showing retail investor losses compared to institutional investors, highlighting market volatility and the impact of high-frequency trading.

The Harsh Truth: Retail Investors Take the Brunt of Market Losses

Retail investors face significant disadvantages in the stock market, often underperforming institutional investors by a wide margin. Studies show that high-frequency trading firms dominate market acti

March 28, 2025
Illustration of a futuristic AI data center featuring NVIDIA’s GB200 Superchip

NVIDIA’s GB200s for up to 27 Trillion Parameter Models: Scaling Next-Gen AI Superclusters

Supercomputers and advanced AI data centers are driving the AI revolution, enabling breakthroughs in deep learning and large-scale model training. As AI workloads become increasingly complex, next-gen

March 21, 2025
NVIDIA Blackwell Ultra GPU unveiled at GTC 2025, revolutionizing AI and HPC with unprecedented efficiency and power.

NVIDIA Blackwell Ultra Fuels AI & HPC Innovation, Efficiency and Capability  

NVIDIA’s latest Blackwell Ultra GPU, unveiled at NVIDIA GTC 2025, is transforming AI acceleration and high-performance computing (HPC). Designed for the “Age of Reasoning,” these cutting-edge GPUs del

March 21, 2025
Nvidia CEO Jensen Huang discusses AI market dominance at GTC 2025, addressing demand concerns and future growth projections.

Nvidia CEO Predicts AI Spending Will Increase 300%+ in 3 Years

Nvidia has traversed choppy waters so far in 2025 as concerns have mounted about how the company plans to sustain its historic levels of demand. At GTC, Huang threw cold water on many of the Street’s

March 20, 2025
Natural gas pipelines supporting AI data centers as energy demand surges, with Texas and Louisiana emerging as key hubs for AI infrastructure growth.

Why Gas Pipelines Are the Unsung Heroes of AI Data Center Expansion

Natural gas is emerging as the backbone of AI data center expansion, with demand expected to reach up to 6 billion cubic feet per day by 2030. As AI-driven infrastructure surges, data centers are turn

March 19, 2025
AI data centers are driving the AI revolution, but their soaring energy demands pose sustainability challenges. With power consumption projected to rise 160% by 2030, data centers are integrating brown, clean, and renewable energy sources. Goldman Sachs predicts 40% of new capacity will come from renewables, but can solar, wind, and nuclear sustain AI’s 24/7 operations? Explore how hyperscalers are evolving their energy strategies to meet growing AI demands.

AI Data Center Power Wars: Brown vs. Clean vs. Renewable Energy Sources

AI data centers are at the heart of the AI revolution, but their massive energy demands raise critical questions. With power consumption expected to grow 160% by 2030, data centers are turning to a mi

March 19, 2025
newsletter

Sign up for Analysis on
the Best Tech Stocks

https://bethtechnology.cdn.prismic.io/bethtechnology/e0a8f1ff-95b9-432c-a819-369b491ce051_Logo_Final_Transparent_IOFUND.svg
The I/O Fund specializes in tech growth stocks and offers in-depth research for Premium Members. Investors get access to a transparent portfolio, a forum, webinars, and real-time trade notifications. Sign up for Premium.

We are on social networks


Copyright © 2010 - 2025