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Tesla Margins Slip in Q4, Musk Says Price Cuts Stirring Demand

Jan. 26, 2023
The EV maker’s leaders are sticking to their 50% annual growth target.

Tesla Inc. executives said Jan. 25 they are further focusing on smoothing out their production cycles so that deliveries become more regular, costs can come down further and the electric vehicle market leader can continue to target 50% annual growth.

Austin-based Tesla produced nearly 440,000 cars in the fourth quarter, a 44% jump from late 2021 that fell short of the 50% target CEO Elon Musk had targeted in October, when he predicted “an epic end of year.” COVID-related shutdowns in China hamstrung those plans for 2022 but the Tesla team is forecasting the company will crank out 1.8 million cars this year—including the first of its cybertrucks—and Musk said that number could get close to 2 million without supply-chain snarls like the world economy has seen in recent years.

As for demand, Musk said on a call with analysts and investors that buyer interest has been strong of late and spurred by significant recent price cuts.

“I want to put that concern to rest,” Musk said about demand worries amid a broadly weaker macroeconomic picture. Noting that January orders have been the highest in Tesla’s history, he added that “we are currently seeing orders at almost twice the rate of production […] Basically, price really matters.”

Tesla, which earlier this week announced big investments in Nevada, booked a net profit of nearly $3.7 billion on revenues of $24.3 billion in the last three months of 2022. Those numbers were up 59% and 37%, respectively, from the same period of 2021, with the bottom line lifted by a 16% drop in operating expenses. Automotive gross margins, however, slipped more than four points to 25.9% and free cash flow fell by half to $1.4 billion even though capital spending rose only slightly to nearly $1.9 billion.

Musk and CFO Zachary Kirkhorn three months ago called out late-quarter production bottlenecks as an issue because they were creating spillover transportation problems. In Tesla’s Q4 earnings report, the executive team said it is “accelerating [its] cost reduction roadmap and driving towards higher production rates.”

Kirkhorn also said the Tesla team expects to book between $150 million and $250 million in the next few quarters in tax credits related to the Inflation Reduction Act, which incentivizes buyers to look at EVs built in the United States. He added that that number should grow as Tesla’s production ramps.

Shares of Tesla (Ticker: TSLA) rose more than 4% after hours Jan. 25 to about $150. They are, however, still down more than 40% over the past six months, trimming the company’s market capitalization to about $460 billion.

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