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- Tesla's profits took a hit in Q1 thanks to price cuts.
- Musk says Tesla has to sacrifice some margins for volume right now.
- Margins are now 'keeping Tesla investors up at night,' Wedbush analyst Dan Ives said.
Elon Musk has opted to sacrifice some of Tesla's enviable automotive profit margins in favor of chasing sales volumes, a move that has some investors feeling antsy.
After six price reductions and an ensuing price war with big brands like GM and Ford, Tesla reported a 24% decline in first-quarter profits and a loss of about 5 percentage points of automotive profit margins.
While some of these results were expected, investors and analysts are worried that Musk did not present a clear path toward restoring pre-price cut profitability.
"Margins are now a delicate issue that are keeping Tesla investors up at night," Wedbush analyst Dan Ives wrote in a Thursday note to clients. "This margin compression and price cut narrative must be carefully managed over the coming quarters as it now emerges as a clear overhang on the stock."
Tesla shares led an overall market decline Thursday morning, down as much as 9.5% to their lowest level since January.
Elon says he knows what he's doing
While some investors angst over Tesla's price cuts, Musk defended the company's strategy in a call with analysts after earnings were released Wednesday evening.
"We've taken a view that pushing for higher volumes and a larger fleet is the right choice here, versus a lower volume and higher margin," Musk said. He pointed to other ways Tesla could drive profitability outside of vehicle transaction prices, such as selling features like Full Self Driving, Tesla's driver-assist software.
"We do believe we're, like, laying the groundwork here, and that it's better to ship a large number of cars at a lower margin, and, subsequently, harvest that margin in the future as we perfect autonomy," Musk said.
Martin French, a managing partner at consultancy Berylls, would like more details on this plan but says he's hesitant to bet against Musk on this point.
"There's not much to glean yet from that very general statement, but I certainly wouldn't bet against Tesla or Elon Musk on finding other places to squeeze a profit," French said in an interview.
Tesla can lose money while the rest of the industry catches up
While Tesla investors are concerned about lost profits, Elon Musk's competitors are likely squirming, said Stephen Beck founder and managing partner of consultancy cg42.
Barriers to EV ownership like range and vehicle type are dwindling, making pricing the final hurdle for many prospective plug-in buyers. Prices on these cars have remained high to reflect the level of technology and capital investment that has gone into EVs, especially as companies struggle to turn a profit on these cars.
With the padding of more than 20% automotive profit margins, Musk is able to play with prices in a way his competitors can't, Beck said.
"I'm sure most competitors are going 'oh, man, come on,'" Beck said. "This makes their road ahead a lot more difficult."