Shares of Tesla (TSLA +2.37%) fell sharply lower after the company reported softer revenue and profits for the first quarter than the market was expecting. The company is trying to buoy sales volumes amid weakening demand across the auto industry with price cuts on its electric vehicles (EVs), and this is causing many investors to question Tesla's competitive position.
Tesla reported revenue of $23.3 billion. While that was up 24% over the year-ago quarter, it fell short of Wall Street's $23.8 billion estimate.
Compounding the market's worries is Tesla's declining market share. The company's worldwide share of EVs has fallen from 17% in 2021 to 12% at the end of 2022, according to a passenger EV sales tracker from research firm Counterpoint.
However, the market might be placing too much emphasis on market share and not enough on other indicators of the company's health.
Tesla's advantage
Apple is a good example that you don't have to be No. 1 to deliver exceptional returns to shareholders. Apple has been bumping elbows with many other smartphone manufacturers for a long time, but that hasn't prevented investors from making a fortune off the stock since the first iPhone was released in 2007.
The reason is that Apple generates a superior profit margin on its products. Gaining market share is a fool's errand if you can't hold a leading share position profitably. Apple is currently in second place in global smartphone market share, but its brand is valued far more highly than any of its competitors.
The same can be said for Tesla, whose EV designs, vast network of charging stations, and charismatic CEO have done far more to build a brand around the business than any of its competitors.
NASDAQ: TSLA
Key Data Points
There's no doubt that the EV opportunity is huge, and Tesla will be selling many times as many EVs in 10 years as it is today. Its total deliveries in the first quarter were up 36% over the year-ago quarter. While Wall Street worries about price cuts, near-term earnings, and declining market share, the most important indicator that Tesla stock is going to make investors great returns is that it is still generating an industry-leading profit.
Tesla knows what creates lasting value
CEO Elon Musk is clearly aware of Wall Street's concerns on the price cuts, but he was quick to point out the company's key strength on the earnings call. "While we reduced prices considerably in early Q1, it's worth noting that our operating margin remains among the best in the industry," he said.
Indeed, even as Tesla invests to bring the Cybertruck to market and continues to make "significant purchases" of Nvidia's graphics processing units (GPUs) to improve its neural net training capabilities for its full self-driving software, Tesla generates a net profit of $12.6 billion, while China's BYD -- the worldwide leader in EVs, with 20% of global market share -- generates just $2.4 billion in profit.
This chart shows Tesla even further ahead in profitability than other EV companies.
Data by YCharts
Management is using this financial strength to apply significant pressure to competitors. For what it's worth, Global Equities Research analyst Trip Chowdhry believes Rivian Automotive, Lucid, and Fisker could go bankrupt against the onslaught of Tesla's aggressive price cutting.
Regardless of what happens, Tesla is clearly playing the long game here. According to Musk, that's because "We're the only ones making cars that, technically, we could sell for zero profit for now and then yield actually tremendous economics in the future through autonomy. No one else can do that."
It's the lifetime value of the customer that matters. This is what the market is missing, and why the self-driving car stock's recent dip might be a good buying opportunity.
