© Reuters. FILE PHOTO: A view shows the Tesla logo on the hood of a car in Oslo, Norway Nov. 10, 2022. REUTERS/Victoria Klesty
By Hyunjoo Jin and Akash Sriram
(Reuters) – Tesla (NASDAQ:) Inc’s aggressive price cuts have created a wave of demand for its electric vehicles, Chief Executive Elon Musk said on Wednesday, addressing concerns that a weak economy would throttle buyers’ interest.
The company beat Wall Street targets for fourth-quarter revenue and profit earlier on Wednesday despite a sharp decline in vehicle profit margins, and it sought to reassure investors that it can cut costs and continue to generate cash as competition intensifies in the year ahead.
Deep price cuts this month have positioned Tesla as the initiator of a price war, but its forecast of a 37% rise in car volume for the year, to 1.8 million vehicles, was down from 2022’s pace.
Tesla’s sales prospects, as it faces a weak global economy, are a key focus for investors. The company has a long-term target of a compounded 50% annual rise in sales.
Musk addressed the issue at the start of a call with investors and analysts. “These price changes really make a difference for the average consumer,” he said, adding that demand was roughly double production in January and that sales in 2023 could hit 2 million vehicles, absent external disruption.
Shares were up 4.3% in extended trading.
Executives forecast that prices would stay relatively low, at an average $47,000, and that automotive profit margins, which dropped to a two-year low of 25.9% in the reported quarter, would be above 20%. Musk also said recession was probable.
GRAPHIC:Tesla expects to deliver 1.8 million vehicles this year (https://www.reuters.com/graphics/TESLA-RESULTS/jnpwywnbrpw/chart.png)
Acknowledging concerns about the uncertain economy, Tesla said it is “accelerating our cost reduction roadmap and driving towards higher production rates” in the near term.
The company which transformed the global electric vehicle market has outperformed the industry and increased sales and profit to records in recent years, weathering the pandemic and global supply-chain issues better than rivals.
GRAPHIC: Tesla’s profit growth fell in the fourth quarter (https://www.reuters.com/graphics/TESLA-RESULTS/gkvlwxoqlpb/chart_eikon.jpg)
“Tesla’s demand outlook is a whole lot more bullish than practically any other automaker,” said Garrett Nelson, analyst at CFRA Research, calling the quarter “solid.”
“Margin fell a little short. I think what we’re seeing is inflationary impact and higher raw material costs,” he added.
Analysts had said Tesla’s profitability gave it room to cut prices and pressure rivals. The company’s $9,000 in net profit per vehicle in the past quarter was more than seven times the comparable figure for Toyota Motor (NYSE:) Corp in the third quarter. But it was down from almost $9,700 in the third quarter.
The company’s stock posted its worst drop last year, hit by demand worries and Musk’s acquisition of Twitter, which fueled investor concerns he would be distracted from running Tesla. Musk dismissed the suggestion that his political commentary on Twitter had become divisive or a problem for Tesla.
Margins generally are expected to be under further pressure from its aggressive price cuts. Tesla, which had made a series of price increases since early 2021, reversed course and offered discounts in December in the United States, followed by price cuts of as much as 20% this month.
It ended the fourth quarter with 13 days’ worth of vehicles in inventory, more than four times higher than the start of 2022, and a record $12.8 billion in value.
The company said revenue was $24.32 billion for the three months ended Dec. 31, compared with analysts’ average estimate of $24.16 billion, according to IBES data from Refinitiv.
Tesla offered discounts in its top markets during the quarter after strong orders had allowed the company to maintain and even raise prices in recent years. Musk said in December “radical interest rate changes” had affected the affordability of all cars.
The EV maker handed over to customers a record 405,278 vehicles in the fourth quarter, even as the company missed its 50% annual growth target.
Net profit for the quarter was $3.69 billion, or $1.07 per share, compared with $2.32 billion, or 68 cents per share, a year earlier. Adjusted earnings per share of $1.19 topped the Wall Street analyst average of $1.13.
Tesla’s full-year profit was bolstered by $1.78 billion in regulatory credits, up 21% from a year ago.
The company is relying on older products but Tesla said its Cybertruck, its next new electric pickup truck, would begin production at its Texas factory later this year. It said it would detail plans for a “next-generation vehicle platform” at its investor day in March.
“Tesla’s plans to rapidly scale up output will only stimulate profit growth if demand is there to meet it. Even a small cooling of demand will have significant implications for the bottom line,” said Sophie Lund-Yates, an analyst at Hargreaves Lansdown.
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