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Tesla’s Price Cuts May Fire Up Revenue, But Risk-Slumping Profits

Tesla's aggressive discounting strategy seems poised to deliver the strongest quarterly revenue growth in over a year, though at the expense of dwindling profit margins.

Tesla's charging station
Tesla's charging station

Price War Aids Sales but Threatens Profit Margins

Tesla (NASDAQ: TSLA)'s price-cutting strategy, aimed at bolstering sales and warding off competition, appears to be working. The EV giant is on track to deliver its most robust revenue growth in five quarters during the April-June period. However, this aggressive approach has negatively impacted the company's profit margins, pushing them to a three-year low.

Gross Profit Margins Suffer Amid Sales Boost

Tesla's Q2 earnings, expected to be revealed on Wednesday, will likely show a decrease in gross profit margin to 18.9%, a noticeable drop from the 20.2% last quarter and 25.9% from the same period last year, according to Visible Alpha's poll of 19 analysts. The only reason the company managed to deliver slightly more cars this quarter, compared to the last, was through heavy discounting at the cost of its margins, says mobility-focused investment banker Vitaly Golomb.

Inventory Build-up, Dwindling Demand Suggest Market Saturation

Tesla appears to have reached a saturation point in demand, according to Golomb, with a growing inventory of their Model 3s and Model Ys. Despite predicting in October that it would sell every car it manufactures in the foreseeable future, Tesla produced 13,560 more vehicles this quarter than it delivered.

Stiff Competition and Lack of New Models Impede Tesla's Progress in China

Tesla's efforts to combat rivals in China have been hampered by an uneven economic recovery and fresher, more appealing offerings from local manufacturers. Although the EV giant recorded high deliveries of China-made cars in the quarter, its share of the Chinese electric and hybrid market slipped from 10.5% in Q1 to 8.8% in Q2 of 2023, as per a Reuters calculation.

Tesla Bets Big on Charging Network Amid Slowing EV Sales

As the EV market slows, Tesla has sought to diversify its revenue by aggressively capturing a larger portion of the U.S. charging market. Collaborations with companies like Ford Motor and General Motors for the usage of its North American Charging Standard (NACS) have more than doubled its market value this year, soaring to $880 billion.

Charging Partnerships Expected to Boost Future Revenue

Tesla's partnerships with charging companies, along with their adoption of Tesla's standard, although contributing little to Q2 revenue, are anticipated to significantly impact the company's top line in the future. Analysts expect Tesla's charging network revenue to hit $9.65 billion by 2032, according to Piper Sandler, with over half the sales generated from non-Tesla EVs using the network.