Tesla's price cuts, consumer demand are focus of Q4 earnings

Tesla Inc.'s decision to sharply cut prices is expected to have a short-term impact on fourth-quarter earnings, but longer-term implications for the EV maker as it juices demand at the cost of profits, analysts said.

Retail and institutional investors want to hear from CEO Elon Musk on the fourth-quarter earnings call Wednesday on Tesla's pricing strategy as the automaker defends its EV market share, which sits at about 65 percent in the U.S.

Tesla temporarily cut prices in December to clear inventory, offering $7,500 discounts in the U.S. That was followed by January's open-ended price cuts for new orders of up to 20 percent. The bestselling Model Y crossover saw a $13,000 reduction, in addition to newly qualifying for a $7,500 tax break under last year's Inflation Reduction Act.

Musk said in December he expects an economic slowdown this year to weigh on vehicle demand across the industry.

Among top questions submitted by retail and institutional investors for consideration on the earnings call after the market close on Wednesday is one asking whether the automaker would provide forward guidance on average selling price per vehicle and gross margins as a result of the price cuts.

Another question asks whether the start of production for the Cybertruck pickup is on track for mid-2023, according to Tesla's investor relations department.

Generally, Tesla's fourth-quarter earnings are expected to be positive on sharply higher vehicle deliveries and elevated gross margins per vehicle compared with the industry as a whole. But the prospect of lower profits for an extended period could weigh on the stock price after earnings are announced, analysts said.

"I just do the simple math that the average discount across the board, across all their vehicles if you weight it by volume, is close to 15 to 20 percent and a lot of that comes from the profit," said Gene Munster, managing partner at Deepwater Asset Management, in comments on CNBC Monday.

Munster said he expects Tesla's gross profit per vehicle to fall from 27 percent in third-quarter 2022 to as low as 15 percent for 2023 and wants to hear company guidance.

"I think ultimately they're making the right decision," Munster said of the price cuts. "They're really going to put other car companies in a tight position in 2023 and 2024."

Bank of America said in a research note last week that Tesla's lower prices will drive significantly higher volume even as it reduces revenue per vehicle by 10 to 20 percent. Tesla can carry out the new pricing strategy because its margins are much higher compared with industry peers, many of which are losing money on EVs, the bank said.

Tesla's stock price has been trending higher since the price cuts. Its stock closed at $143.75 on Monday vs. $122.40 on Jan. 13, the first trading day after the automaker reduced its pricing in global markets.

For the fourth quarter, Tesla delivered 405,278 vehicles, short of analyst expectations of around 430,000 vehicles. For the year, deliveries rose by 40 percent to 1.31 million, below Tesla's own forecast of around 50 percent growth. Global production rose 47 percent compared to 2021, to a record 1.37 million, Tesla said.

The automaker is expected to report a 36 percent increase in revenue compared with the quarter a year prior, to $24 billion, based on analyst estimates, Reuters said. Earnings per share is expected at $1.13, or about $3.6 billion.

"We have long believed Tesla had an opportunity to shout out competition in the EV market had it raised even more capital and grown capacity faster, driving even stronger growth," Bank of America said. "While Tesla opted not to pursue that approach, its recent pricing actions may reflect a similar method to crowd out competition."