Tesla stock drops on margin issues, Musk warns about third-quarter production

Tesla (TSLA) stock fell 9.7% on Thursday, its worst day since April, after the electric vehicle maker reported higher revenue and profit but lower margins than expected.

Tesla CEO Elon Musk also signaled that third-quarter production would be down slightly.

“We continue to target 1.8 million vehicle deliveries this year, although we expect third quarter production to be down a bit because we have summer shutdowns for many factory upgrades, so probably a slight drop in third quarter production for some kind of global factory upgrade,” Musk said during his opening remarks on the conference call.

Tesla’s closely watched second-quarter gross margins came in at 18.2%, below analysts’ expectations of 18.8%. Tesla’s operating margin also fell below 10% to 9.6%, nearly 5% – 493 basis points, to be precise – below where it was a year ago.

“The short-term variances in gross margin and profitability are really minor compared to the long-term picture. Range will make all of those numbers look ridiculous,” Musk said during the Q&A portion of the call, later adding that “it makes sense to sacrifice margins in favor of making more vehicles.”

Prior to Wednesday’s earnings report, Tesla stock had gained more than 130% in 2023.

Tesla also reported that it was working on installing Cybertruck equipment at its gigafactory in Austin, Texas, with initial production expected to begin “later this year” with the first deliveries to customers.

According to Musk, demand for the new truck is “stalled”.

“The demand is so off the hook you can’t even see the hook,” Musk said of the Cybertruck. “So it’s really not a problem.”

In terms of other services, Musk revealed that Tesla now has nearly 50,000 Supercharger connectors and more than 5,000 stations worldwide. Musk also revealed that the company was in preliminary talks with a “major OEM” regarding the licensing of its fully autonomous driving (FSD) software.

Tesla CEO Elon Musk stands in front of a Cybertruck on a stage in front of a crowd during a presentation.

Tesla co-founder and CEO Elon Musk shows off the new battery-powered all-electric Tesla Cybertruck at the Tesla Design Center in Hawthorne, California on November 21, 2019. (Photo by FREDERIC J. BROWN/AFP via Getty Images)

From a Wall Street perspective, the analyst community felt the report and subsequent earnings call provided no major surprises and came in better than expected.

“Overall, this was a Goldilocks 2Q impression by Musk & Co. given all the noise surrounding the story heading into this quarter,” Wedbush analyst Dan Ives said in a note to clients. Ives also raised his price target to $350 for the stock.

“We expect stocks to trade slightly lower as the current valuation likely called for a stronger second quarter result. That said, no major surprises here either,” Citi analyst Itay Michaeli said in his analysis.

Guggenheim’s Ron Jewsikow, which has a sell rating on Tesla, was less optimistic.

“Overall, although the impression was better than expected, prices, production, operating leverage and demand comments are likely to weigh on stocks after the stock’s considerable run,” he said.

For the second quarter, Tesla reported revenue of $24.9 billion, beating Street estimates of $24.51 billion, with adjusted EPS of $0.91 versus estimates of $0.81. This turnover represents a slight gain compared to the first quarter and a jump of more than 45% compared to a year ago.

On the profitability side, Tesla reported adjusted net income of $3.1 billion, versus estimates of $2.87 billion and higher than the first quarter’s adjusted net income of $2.9 billion.

Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on instagram.

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