Tesla becomes more ordinary
Price cuts reduce exceptional profitability

Tesla reported weaker third quarter results on Wednesday, showing signs that its meteoric growth is slowing down. CEO Elon Musk struck an unusually sober tone in the earnings call, citing economic headwinds and company-specific problems.
A key issue is the price war Tesla initiated itself by slashing prices in the US by one-third on some models. While the discounts boosted demand, they are eating into profits. Revenue rose 9% year-on-year to $23.3 billion but missed analyst estimates. More worryingly, net income plunged 44% to $2.3 billion, also falling short of forecasts.
Tesla skeptics are zeroing in on the collapsing margins. Operating margin dropped to just 7.6% in Q3, down from 17.2% a year earlier. This brings Tesla closer to traditional automakers it has long outpaced. Ferrari recently posted a 24% margin, Volkswagen 7.3%. The weak results sent Tesla’s share price down over 9% on Thursday, with several banks cutting price targets. Morgan Stanley lowered its target to $380 from $400, Goldman to $235 from $265.
Adding to Tesla’s woes is trouble with the Cybertruck, its hotly anticipated pickup aimed at conquering middle America. Musk poured cold water on hopes for a timely launch. Due to engineering challenges, he expects the radical Cybertruck won’t contribute meaningfully to cash flow for 1-1.5 years. “We got our heads handed to us,” Musk admitted, citing the vehicle’s complexity.
For years, the Cybertruck has suffered design changes and cost overruns. Prototypes reportedly had issues with leaks, noise and drivability. On Wall Street, doubts are growing about Tesla's growth narrative as competition intensifies. The recent price cuts fueled suspicions that demand is waning for Tesla's hype-driven vehicles.
Despite the weak results, Tesla still expects 50% delivery growth annually, projecting 1.8 million vehicles in 2023. But Musk declined to forecast 2024, saying Tesla cannot sustain this pace "forever." There is also uncertainty around Tesla's Mexico factory. Musk is hesitant to ramp it up aggressively amid global economic uncertainty. Reports suggest the project faces local funding and permit issues, jeopardizing the timeline.
With Tesla sitting on excess inventory after overestimating demand, analysts expect further margin compression this quarter. While lithium prices have eased, this is unlikely to fully offset the price cuts. Some observers remain optimistic. Publicis Sapient's Alyssa Altman noted short-term margin pressure but believes Tesla has strengths like its self-driving lead. Yet the loss of its huge performance edge marks a transition point.
