What happened
Tesla (TSLA 12.06%) reported its highly anticipated first-quarter results after the market close Wednesday, and investors were not impressed. The electric vehicle (EV) leader's shares tanked by more than 8.5% at Thursday's market open and remained down by 7% as of 10:15 a.m. ET. That drop brought Tesla stock to its lowest level since January.
So what
Most analysts and investors were focusing on how Tesla's profit margins would change after the company reduced its EV prices globally. With its latest price cut, which it made on Wednesday ahead of the earnings report, Tesla has now trimmed its vehicles' U.S. sticker prices on six separate occasions this year. For the quarter, its automotive gross margin came in at 18.3% -- much lower than anticipated, and down from more than 25% in the fourth quarter. On the fourth-quarter 2022 conference call in January, Tesla management said that they expected to maintain a 20% margin over the course of 2023. But CEO Elon Musk was unapologetic and shifted the investment narrative during Wednesday evening's conference call.
Image source: Tesla.
Now what
"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 stated. He added that this is a long-term approach that seeks to increase profitability as the company adds features such as autonomous driving in the future.
This seems to have caught the market off guard. While investors knew Tesla's margins would be under pressure due to the vehicle price reductions, many likely expected that it would have also found ways to cut costs to help offset the impact. But Musk verbalizing a preference for volume over profits is something that wasn't anticipated.
The market's reaction here has created a better opportunity to buy Tesla stock for those investors who believe that the company's fully autonomous driving plans will come to fruition in the future. The automaker also continues to generate strong profits and free cash flow even with the lower margins. Tesla reported $2.5 billion in net income in the first quarter. The EV leader still maintains some of the highest margins in the industry, which Musk also pointed out. If Tesla is successful in its self-driving vehicle efforts and its other ventures such as energy storage, those who take advantage of Thursday's stock drop to pick up shares could enjoy favorable long-term returns.
