Tesla’s strategy for driving Sales through price cuts combined with the cost of bringing the Cybertruck into production and other R&D expenses are putting pressure on fourth-quarter earnings, according to earnings reported Wednesday.
While the company has managed to continue to expand sales – delivering a record 1.8 million EVs in 2023, it hasn’t translated into the same increase in profits or even revenue. Although Tesla’s deliveries have increased, its profits have been largely constrained by price cuts aimed at boosting sales and increased costs associated with future products.
Plus, Tesla reservations in the fourth quarter and the annual earnings announcement it is currently “between two great waves of growth.” While the Model Y and Model 3 have propelled the company to greater success in recent years, Tesla says its vehicle sales growth “may be significantly lower” in 2024 as it prepares to launch a new vehicle platform on which it plans to build a smaller EV that costs about $25,000.
Shares fell 5.8% to $195.60 in after-market trading after the earnings report.
Tesla’s $25,000 EV
That smaller, cheaper EV will go into production in late 2025 at the company’s Texas plant, CEO Elon Musk said in a call Wednesday, noting it’s the only suitable location “because we really need the engineers to live on the line.” .
Production of the small EV will then expand to a yet-to-be-built plant in Mexico, according to Musk. Drew Baglino, the company’s senior vice president of powertrain and power engineering, later reiterated that the company “wants to first demonstrate success with the next-generation platform in Austin before we start manufacturing” in Mexico. These comments suggest that construction at the Mexico plant will not begin until 2026.
Musk said the company plans to locate a third factory site outside of North America by the end of 2024, where production of the next-generation smallest EV will eventually expand beyond Mexico.
There’s a “tremendous amount of revolutionary new manufacturing technology” packed into the new platform, Musk said.
Operating income is down
Tesla reported net income (on a GAAP basis) of $7.9 billion in the fourth quarter, an unusually large amount that includes a one-time tax benefit of $5.9 billion to release the valuation of certain deferred tax assets.
The company’s operating income and profits on an adjusted basis provide a clearer picture of its financial performance.
Tesla reported operating income of $2.06 billion in the fourth quarter, down 47% from the same period last year. Those results were negatively impacted by an increase in operating expenses driven largely by artificial intelligence and other R&D projects, the cost of the Cybertruck production ramp and lower revenue from its so-called Full Self-Driving software, according to Tesla. Tesla spent $1.1 billion on research and development in the fourth quarter, up 35% from the same period last year.
On the other hand, Tesla said it benefited from lower costs per vehicle, including the cost of raw materials, credit from the Act to reduce inflation and increased vehicle deliveries – all of which helped narrow the profit gap.
On an adjusted basis, the company earned $3.9 billion, down 27% from the same period last year.
Tesla managed to regain some of its auto industry-leading margins in the fourth quarter, thanks in part to a push to further cut costs.
The company’s automotive gross margins, excluding regulatory credits, stood at 17.2%. This is the first quarterly increase since Tesla began cutting prices heavily last year. But Tesla also said in the report that it is reaching the “natural limit” of how much it can cut costs on existing vehicles. “[O]at any given time, we expect our hardware-related earnings to be accompanied by acceleration in AI, software and fleet earnings,” the company wrote.
Revenue continued to grow, albeit at a slower pace than Tesla had enjoyed in the past.
The company said it generated revenue of $25.17 billion in the fourth quarter, up 3% from the same quarter last year. The results just missed analysts’ expectations. Analysts expected the company to earn about $25.62 billion in revenue in the fourth quarter of 2023, according to Yahoo Finance data.
Tesla’s energy storage business is growing
While Tesla has been cautious about vehicle development in 2024, the company remains bullish on the growth of its energy storage business. Storage deployments grew 125% year-over-year, even with a slower fourth quarter.
It’s becoming such a stable corner of Tesla’s business that the company will begin releasing growth figures alongside its standard quarterly vehicle production and delivery reports, Baglino said on the call.
“I’ve said for many years that the storage business would grow much faster than the car business, and it does,” Musk said.
