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The interesting impact of interest rates on automotive gross margins
Shares of Tesla are off this sunrise in the wake of the company ’s Q3 2023 wage story . TechCrunch covered the caller ’s aggregate resultshere .
While Tesla ’s upshot missed street estimates in both revenue and net terms , there was much to wish aboutthe troupe ’s one-fourth . Revenue was up modestly ( 9 % ) , with Tesla ’s non - self-propelled revenues ( energy , services ) grow much more quickly than top logical argument from selling cars , showing the note value of somewhat diversified revenue sources .
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And Tesla is still profitable . Despite a decline in its crying profit in the quarter , the company reported $ 1.85 billion in generally accepted accounting principles net income in the third quarter and free cash flow of $ 848 million .
So why is the line of descent selling off and analyst wring their mitt ? Tesla hasreduced the damage of its vehicles in late living quarters . That has help the party nonplus to its goal of deliver 1.8 million vehicle this class , but with a lower terms point for much of its line , the company is under margin pressure .
As TechCrunch remark Wednesday after Tesla ’s numbers first dropped :
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Tesla reported gross margin of 17.9 % in the third quarter , falling from 25.1 % in the same flow last twelvemonth . It ’s also down from Q2 when it report margins of 18.2 % .
Where Tesla ’s tolerance are go is not an idle query . The company has enjoy vulgar margins far in excess of its major automotive rivals in recent year :
This chart does not include Tesla Q3 2023 data point , and the other society listed have yet to report their own third - quarter resultant role , so take the data point with a caryopsis of salt .
What matters is that Tesla has managed better unadulterated gross profit margin than its rivals for some clock time , though its tip has started to refuse compare to Stellantis . course , when comparing companies of this size , a blended gross margin figure of speech is going to include a host of things that we might need to pillage . Still , the trend appears clear even with that caution , peculiarly if we admit the fact that Tesla ’s gross margins check off down to 17.9 % in its most late quarter .
Can Tesla keep work lots of money while cutting the cost of its gondola ? During its net profit call , the fellowship stressed an ongoing travail to reduce costs . Tesla ’s CFO Vaibhav Tanejasaid that the companyhas a “ a whole washing listing of thing [ it ’s ] trail ” to find space to reduce per - auto costs , adding that the EV giant is “ literally going line by line and say , ‘ How can we make it better ? ’ ”
chief executive officer Elon Musk likened the situation to the pop “ Game of Thrones ” phantasy serial , but one where the game being played is all about “ penny ” and looking for office to save more of them .
The question I have is where to delineate the crinkle between reducing per - car cost and continuing to post outsize thoroughgoing gross profit margin at Telsa . The company had a very interesting solvent to how it is approaching that question during its net income call . Here ’s Musk during the conversation :
I keep harping on this stake thing , but I mean it just — [ rising ] interest rate[s ] raise the cost of the automobile . I mean , we ’re looking at inner analysis , which I fuck we mean is more or less on caterpillar tread that when you look at the cost — or the price reductions we ’ve made in , say , the Model Y and you compare that to how much people ’s monthly payment has risen due to interest rate , the price of the Model Y is almost unaltered . . . .
The thing that matters is the monthly [ payment ] — it ’s how much money do they have to put down and do they literally have that in their camber report or their check mark Libra the Balance , and then what is the monthly defrayment . And it does n’t count how — if that monthly requital is chief pastime or whatever , it ’s just a number , and that number has to not make their bank account to go negative .
So , going from near - zero interest rate to kind of the current very high interest rates , the existent monthly requital is essentially the same . It ’s just a bunch more of it is plump to pursuit .
Tesla terms reductions , then , are an effort to keep the good monthly payment for its car steady for consumers who utilise credit for their purchase . As sake rates have develop , the price of money has risen . Thus , to take over money cost more money . consumer do n’t have more , so Tesla has reduced the price of some of its car so that their actual monthly disbursal is flat . To some point this excuse the continued , incremental toll cuts at Tesla that we have seen latterly .
For consumer , this is pretty darn coolheaded . bland price of a Model Y on a per - monthly basis despite more expensive money ? Orcinus orca . For Tesla , however , it ’s a chip wily .
distinctly Tesla can continue to sire hefty earnings from lower - price cars . But investor are anticipate the company ’s results to take a nick from the craft - offs it is make — which we infer from the company ’s share price falling Thursday in the wake of its net income story — which is something for us to keep an center on .
That ’s because Tesla is not valued like other car companies . Here ’s another chart showing what I mean :
If Tesla winds up valued like its self-propelling competitor , it would see its valuation dramatically cut . So it involve to do not like a gondola company to keep its economic value high . Thus , seeing its glaring margins contract bridge , which makes it look a bit more like yet another car troupe , is worry for its investors .
