Tesla Inc. is set to release its third-quarter results, which will test the strategy of investors who have been pushing the company’s stock higher despite deteriorating fundamentals. The electric-vehicle maker has seen its profit estimates drop by almost 50% this year due to aggressive price cuts aimed at boosting demand. However, the stock has more than doubled over the same period, adding over $420 billion in market value. This conflicting trend is a result of investors betting on Tesla’s continued dominance in the EV market and its potential as a leader in self-driving cars and artificial intelligence. However, Tesla’s rapidly eroding margins are raising doubts about the sustainability of its sales growth through a price war.
One key metric that will be closely watched in Tesla’s report is automotive gross margin, a measure of profitability in its core car-selling business. Analysts expect this measure to drop to approximately 19% from 28% in the same period last year. Some experts believe that margins will rebound in the final quarter of the year, but others are concerned about the long-term viability of Tesla’s business model.
Tesla’s market valuation suggests that investors see it as more than just a carmaker. While near-term margin declines may be seen as a temporary setback by bullish investors, skeptics are questioning whether Tesla’s profitability can be maintained if the rate of deliveries slows and new models come at lower profitability.
Elon Musk, Tesla’s CEO, has previously stated that sacrificing margins in favor of producing more vehicles makes sense, as he believes the value of the cars themselves can significantly increase once they have full autonomous driving capability. However, experts suggest that this outcome may still be a decade or more away.
Despite efforts to stoke demand through price cuts, Tesla’s third-quarter deliveries still fell short of analysts’ estimates and marked the first quarterly decline in over a year. Profit is also expected to be lower than the previous year’s quarter. However, revenue in 2024 is estimated to jump over 25%, along with a 37% increase in earnings, reflecting expectations that Tesla will maintain its lead in the EV industry as consumer adoption accelerates. Investors will also be looking for any updates on the release of the highly anticipated Cybertruck.
While falling prices have not hindered Tesla’s revenue growth, some analysts are questioning whether the company’s already high margins can be sustained if they continue to move slightly lower. However, others believe that Tesla has the best margins per unit sold in the automotive industry, suggesting that a material weakness is not imminent.
In other tech news, ASML Holding NV reported revenue that missed estimates for the first time in seven quarters, leading to a 2.4% drop in its shares. Nvidia Corp. also experienced a significant decline in its stock after the Biden administration stepped up efforts to restrict the company’s sale of processors designed specifically for the Chinese market. Meanwhile, OpenAI is developing a tool to accurately detect images created by artificial intelligence, and Hon Hai Precision Industry Co., known as the maker of Apple Inc.’s iPhone, is expanding its push into the electric vehicle sector by integrating artificial intelligence.
Earnings reports are due from various companies on Wednesday, including Netflix.
Overall, Tesla’s third-quarter results will provide insight into whether its stock can continue to thrive despite challenges to its profitability. Investors and industry observers will be keeping a close eye on the company’s margins, delivery figures, and any updates on future models.