When Tesla (NASDAQ: TSLA) lowered the sticker prices on its electric vehicles (EVs) early this year, investors rightfully expected the move to crimp the company's per-car profits. What wasn't clear was by how much or how long the discounting would work against Tesla's bottom line.
After three reported quarters' worth of this discounting, however, investors are getting a better feel for the fallout. Tesla's per-car profits continue to dwindle, with sticker prices still falling faster than their production costs.
And yet, there's plenty of room and reason for both figures to keep falling. It's not too soon for shareholders to start asking when and where this profit deterioration will stop.
Per-car profits still shrinking
To be clear: Tesla is still making tons of money on every electric vehicle it produces. For a stock that's valued at 66 times this year's projected per-share profits and over 50 times next year's expected earnings, however, you'd expect per-vehicle profits to be growing rather than shrinking.
The graph below tells the tale. Last quarter, Tesla's average revenue per delivered vehicle came in just a tad above $45,100, with the lower-cost Model 3 and Model Y cars accounting for over 96% of those deliveries. The average production cost per electric vehicle rolled in at just under $36,680.
That translates to an average gross profit of $8,431 and an overall net profit of $5,328 (when including Tesla's solar and storage battery businesses, which are basically breaking even) per car. That's down from the peak $17,865 gross profit seen in the first quarter of 2022, or the peak per-vehicle net income of just over $12,000 booked in the same three-month stretch.
Data source: Tesla Inc. Chart by author.
It's not the end of the world. The number is still on the order of about 3 to 4 times more profit than most other car manufacturers like Ford Motor Company or General Motors are generating on their automobiles. The trajectory of these numbers, though, is a legitimate concern for Tesla shareholders. It ultimately points to waning marketability of its brand.
Tesla's competition is proving formidable
Tesla CEO Elon Musk offered up a reasonable post-earnings defense of his company's lackluster results. He believes high interest rates in a sluggish economic environment dampen demand for all automobiles. The headwind, however, is arguably more complicated -- and more troubling -- than that. Competing EV makers are increasingly part of the equation.
How do we know? Although Tesla's total deliveries slipped a bit between the second and third quarters of this year, overall U.S. sales of EVs actually grew in Q3 in spite of the high interest rates Musk laments. Cox Automotive reports a record-breaking 313,086 electric vehicles were purchased in the United States during Q3, in fact, up from Q2's tally of 298,039 and nearly 50% more than were sold in the same quarter a year earlier.
Meanwhile, sales of all automobile types also continued to grow in the United States during this time frame, according to numbers from the U.S. Bureau of Economic Analysis.
Data source: U.S. Bureau of Economic Analysis. Chart by author. Numbers are in millions.
And the fallout from missing out on this market growth is stark. Cox goes on to point out Tesla's share of the U.S. electric vehicle market fell to a lowest-ever-measured 50% during Q3, down from Q1's 62%, which was down from Q1 2021's dominating 71%, which was down from a jaw-dropping 83% for the first quarter of 2020.
Tesla is losing market share. It's not just a U.S. thing either. Sales of battery-powered electric vehicles as well as combustion-powered automobiles in China and Europe -- two other key markets for Tesla -- also continued to accelerate through the third quarter, mirroring the United States' market growth. Much of that growth is being driven by electric vehicle makers other than Tesla. The company is losing market share abroad as well.
Not what faithful Tesla shareholders signed up for
Tesla's biggest problem isn't a weak EV or automobile market; both are clearly doing just fine. Tesla's biggest problems are a marketplace that's finally forcing the company to be price-competitive, and a lack of opportunity for further cost cuts.
While it may take years to finish the job, these competitive pressures could eventually dial Tesla's per-car profit back down to the industry's norm of around $3,000. Tesla's going to be a tricky stock to own that whole time as it may be dishing out per-car profits that most investors likely never anticipated would be so thin.
