Further Price Cut Amidst Rising Inflation to Impact Tesla’s Profitability

Elon Musk, the Chief Executive Officer of Tesla, warned on Wednesday that the leading electric vehicle company could face additional profit declines due to rising interest rates.

The billionaire stated that the company would continue to adjust prices downward to accommodate the surge in interest rates. This decision comes despite months of markdowns that have already impacted the company’s gross margin, which reached a four-year low in the second quarter of the year.

While the continuous price cuts have negatively affected Tesla‘s profit margin, the company revealed plans to invest $1 billion in new models, including the Cybertruck and the in-house supercomputer, dojo, by the end of 2024.

Tesla projected it would produce approximately 1.8 million vehicles this year, but it anticipates a decline in production in the third quarter due to factory upgrades.

Musk downplayed the thinner profit margins as short-term challenges and expressed his belief that sacrificing margins in favor of increasing vehicle production would eventually lead to a significant increase in the company’s valuation. He believes that Tesla’s eventual autonomous-driving capability would make already-sold cars more valuable.

Despite Tesla’s second-quarter performance exceeding expectations with earnings per share at 91 cents (higher than the estimated 81 cents) and revenue growing by 47% to $24.9 billion (higher than the expected $24.5 billion), analysts, like Jefferies’ Philippe Houchois, remain skeptical about the bottoming-out of the company’s margins.

In January, Chief Financial Officer Zachary Kirkhorn had previously stated that Tesla expected to maintain an automotive gross margin of over 20%, excluding revenue from regulatory credits. However, the company fell below this threshold at the start of the year, leading to a revision of that forecast in April.

Last quarter, Tesla’s automotive gross margin (excluding credits) slipped further to 18.1%, the lowest since the second quarter of 2019.

Investors reacted negatively to the news, with the stock falling as much as 4.2% before the start of regular trading on Thursday.