Tesla Stock Drops as Profit Margins Fall, Emphasizing Need for Cheaper EVs

Tesla's stock fell by 8% in pre-market trading on Wednesday after the company reported its lowest profit margins in five years. This has highlighted the need for Tesla to introduce more affordable electric vehicles (EVs) to boost sales instead of relying on price cuts.

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Falling Profit Margins and Market Reaction

Tesla's efforts to increase sales through price cuts and incentives led to automotive gross margins of 14.6% in the second quarter, excluding regulatory credits. This missed analysts' expectations of 16.29%, according to Visible Alpha. Consequently, Tesla's stock dropped by 7.9% to $226.40 in early pre-market trading, potentially losing about $63.7 billion in market value.

Future Plans and Production Goals

Goldman Sachs analysts pointed out that until Tesla begins producing new, cheaper models—expected in the first half of 2025—the company will likely continue to use pricing strategies and incentives, which could further hurt margins. Tesla's EV deliveries have dropped for two straight quarters, with many buyers turning to competitors offering more affordable options.

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CEO Elon Musk acknowledged the competitive pressure, noting that rivals have significantly reduced their EV prices, making it tougher for Tesla to compete.

Long-Term Goals and Technology Focus

Despite the current financial challenges, some analysts believe Tesla's long-term goals could help balance out the impact of short-term margin drops. Alexander Potter, a senior research analyst at Piper Sandler, suggested that Tesla's focus on self-driving technology and other AI-driven products might outweigh the concern over fluctuating margins.

Musk has often described Tesla as a technology company, with self-driving technology at its heart. He expressed confidence that fully self-driving Tesla vehicles, operating without human supervision, would be on the roads next year. However, there is skepticism about this timeline. Tom Narayan of RBC expressed doubts about the company's ability to get the necessary regulatory approvals by 2025.

Analyst Opinions and Stock Performance

Despite the disappointing quarterly results, only one of the 50 analysts covering Tesla downgraded their rating. Three analysts increased their price targets, while two lowered them, according to LSEG data. On average, analysts still rate the stock a "hold," with a median price target of $212.50, indicating an expected 13% drop over the next few months.

So far this year, Tesla's stock has fallen by 0.85% through Tuesday's close, compared to a 16% rise in the S&P 500 index. Tesla's performance and future plans remain closely watched as the company navigates a competitive EV market and aims to achieve its technological goals.

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