(July 20): Tesla Inc’s profitability shrank in the second quarter, showing months of price cuts the electric-vehicle maker implemented to motivate budget-conscious consumers have taken a toll.

The Elon Musk-led company on Wednesday (July 19) reported a gross margin of 18.2% in the quarter, slightly below the 18.8% Wall Street estimated and far lower than the 25% margin from a year ago.

Musk has said he’s comfortable sacrificing profitability for sales volume, and the strategy is clearly working. The company beat both earnings and revenue expectations in the period and had already announced record vehicle deliveries. It also said better days are ahead: Tesla is pouring money into ramping up output of battery cells, the new Cybertruck and other large, growth-oriented projects.

“It does make sense to sacrifice margins in favour of making more vehicles because we think in the not too distant future they will have a dramatic valuation increase,” Musk said.

But investors reacted negatively to weaker profits. Additionally, Musk said production in the current quarter “will be a little bit down” as Tesla performs factory upgrades. The stock fell 3.6% at 6:19pm in New York.

Tesla’s second-quarter profit, excluding some items, came to 91 cents a share, more than the 81 cents analysts estimated. Revenue rose 47% to US$24.9 billion (RM113.5 billion), Tesla said. Analysts had expected the company to generate US$24.5 billion in sales.

The company didn’t break out its automotive margin, a closely watched gauge of Tesla’s profitability which was more than 30% at the start of last year. Analysts pegged the auto margins at 19.2% for the quarter, excluding the impact of regulatory credits.

In January, Tesla chief financial officer Zachary Kirkhorn said he was targeting a 20% auto margin for the the year, excluding regulatory credits. That’s been tough to maintain amid a broader slowdown in EV buying and ballooning inventories, and Kirkhorn walked back the forecast in April.

Inventory buildup

Adding to the Austin-based carmaker’s challenges is its ever-larger inventory of cars. The company said now has 16 days worth of inventory globally, up from 15 days last quarter and four days a year ago.

That’s after months of markdowns, some as large as 30% on best-selling Tesla models, and perks the carmaker has offered, including free charging.

The company said it’s still on pace to grow production about 50% in 2023 from a year ago to roughly 1.8 million cars, even with the third-quarter slowdown that are a result of “summer shutdowns,” according to Musk.

Earlier this year Musk said Tesla has “a shot” at making two million vehicles.

Analysts have said new models, like the Cybertruck, could help Tesla maintain its extraordinary sales-growth rate. However, the long-awaited truck likely won’t be available in large volumes until next year. The first Cybertruck rolled off the line in Tesla’s Austin factory just recently, the company said over the weekend.

Tesla clarified the Cybertrucks being built now, already two years late, are actually “release candidates” and not for sale. It didn’t offer any information about pricing, though said the first Cybertrucks will probably hit the market later this year.

Musk also touted the company’s work on its driver-assistance software, which Tesla said it wants to license to other automakers. However, most investors expect it’ll be years before cars will be able to safely run without a human at the wheel.

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