Tesla's Aggressive Price Discounting May Have Hurt Gross Margins By This Much In Q4

Tesla Inc. TSLA shares started the year on the back foot, as light fourth-quarter deliveries spooked investors.

What Happened: The bad news, however, may not all be in the rearview as the electric vehicle maker’s recently-announced price cuts across regions are expected to hurt margins and, in turn, profitability. More details on the margin impact will emerge when the company reports its fourth-quarter results on Jan. 25.

See Also: How To Invest In Tesla (TSLA) Stock

Quantifying The Impact: Tesla’s aggressive price discounting in the fourth quarter may have impacted the average sales price of vehicles by about 3%, or over $1,600 per car, Bernstein analyst Toni Sacconaghi said in a note. This points to a 250-basis-point decrease in auto gross margins, the analyst said.

Although the net impact could be lower, the consensus estimates for auto gross margin, excluding credits, of 27.6% for the fourth quarter are too aggressive, Sacconaghi added.

The positive impact of the continuing ramp of the Berlin and Austin gigafactories will likely be mitigated by the fact that these two factories have lower margins than the company average, he said. Given the pullback in the dollar in the quarter, the analyst expects the forex impact on revenue to be a positive 50 basis points relative to the previous quarter.

Raw material costs and freight costs, according to Sacconaghi, may have declined sequentially, helping to offset price declines.

Significant Demand Problem: Sacconaghi is of the view that Tesla is facing significant demand problems, with the fourth-quarter book-to-bill ratio likely at less than 0.65 times despite the significant price cuts. The annualized fourth-quarter order run rate with the significant discounting was only about one million units, Sacconaghi noted. The company, meanwhile, looks to sell close to two million units in 2023 with no new models, he added.

Despite the stock trading close to Bernstein’s 2050 discounted cash flow and investor sentiment remaining horrible, the analyst isn’t convinced about the attractiveness of the valuation. Investors are underestimating the magnitude of demand challenges the company is facing, with the potential for the 2023 and 2024 numbers to be reset, Sacconaghi said.

“We also worry about the potential for broader market pressure amid higher rates and slower consumer spending, which could continue to impact higher valuation stocks such as TSLA disproportionately,” he added.

Bernstein has an Underperform rating on Tesla shares and a $150 price target.

Price Action: Tesla closed Tuesday’s session down 12.24%, at $108.10, according to Benzinga Pro data.

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