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- Tesla is scheduled to report second-quarter earnings on Wednesday after the market close.
- Wall Street is laser focused on the company's profit margins after the company cut prices for its vehicles.
- Here's what Wall Street expects from the EV maker's upcoming earnings report.
Tesla is scheduled to report its second-quarter earnings results on Wednesday after the market close, and Wall Street analysts are laser focused on the company's gross margin levels.
"Margins, margins, margins," Wedbush analyst Dan Ives wrote in a Monday note.
Aside from its fleet of electric vehicles, Tesla set itself apart from the rest of the auto industry by having exceptionally high margins, peaking at nearly 30% in the first-quarter of 2022. That was more than double other automakers' profitability levels, including Ford and General Motors.
But since then, Tesla's margins have dropped to just under 20% after the company implemented a series of price cuts to help boost demand for its vehicles.
And the price cuts worked. Tesla delivered a record 466,000 vehicles in the second quarter, well ahead of Wall Street estimates of 447,000. The strong deliveries should translate to solid revenues for Tesla.
"As we have discussed the aggressive price cuts were a near-term pain for long-term gain strategic move for Tesla to put an iron fence around its installed base and gain new EV customers by cutting prices in a choppy macro backdrop. So far this has been a home run strategy," Ives said.
The consensus on Wall Street is for Tesla to generate $24.5 billion in revenue for the quarter, along with earnings per share of $0.82, according to data from Yahoo Finance. The real question for Tesla investors is how much of the company's profit margin was sacrificed to sell so many vehicles via price cuts.
Ives expects Tesla's gross margin to drop to 17.5% in the second quarter, which would be a decline from 19.3% in prior quarter and its lowest level since 2019. But after that, he expects margins to rebound back to 20% heading into 2024 as demand for its vehicles should remain strong.
Ives pointed to a potential refresh of the Model 3 and Y, combined with the rollout of the Cybertruck as catalysts for Tesla to retain solid demand. He has an "Outperform" rating on Tesla and a $300 price target, representing potential upside of about 4% from current levels.
JPMorgan is less bullish on Tesla stock, even though it acknowledged the strong second-quarter deliveries. But according to JPMorgan analyst Ryan Brinkman, much of the gains for Tesla are already priced into the stock while Wall Street's estimates have deteriorated.
"The last time Tesla shares closed as high as they did on June 30, Bloomberg consensus was for 2Q23 revenue of $29.0 billion (vs $24.3 billion today), EPS of $1.42 (vs $0.80 today) and deliveries of ~467,000 (in line with the amount just reported)," Brinkman said in a note earlier this month.
Ultimately, Tesla's price cuts have clear implications for the company's long-term earnings power, and therefore the price of its stock. According to JPMorgan, Tesla's stock price is too high, with the bank assigning an "Underweight" rating and a $120 price target, representing potential downside of 58% from current levels.