Tesla Keeps Pressure on Rivals Even as Margins Shrink

Tesla shook up the global auto industry earlier this year by slashing prices by up to 20% to spur slowing sales. It was able to do this because it has a cost advantage over other EV makers. The lower-cost platform could be Tesla’s next salvo as it tries to expand its position as the world’s largest EV maker.

“The price really matters,” CEO Elon Musk said during the earnings call. “These changes makes a difference for the average consumer.”

Tesla reported fourth-quarter earnings per share of $1.19 from sales of $24.3 billion. Operating profit was a record $3.9 billion, up from the prior record: $3.7 billion in the third quarter.

Wall Street was looking for earnings per share of about $1.13 and operating profit of $4.2 billion from $24.7 billion in sales. Free cash flow for the quarter came in at $1.4 billion. Analyst were expecting $2.7 billion. Looking ahead, Tesla said it plans to produce 1.8 million units in 2023. The Street is looking for about 1.9 million units.

All the numbers look fine. Most important numbers trailed Street estimates by a little, but Tesla stock is already down about 35% over the past three months. Expectations weren’t all that high headed into the report.

Shares rose 3.8% shortly after results were released, trading to almost $150 a piece. Shares settled down, up about 1.5% at $146.50. Tesla stock closed up 0.4% at $144.43 in Wednesday trading. The S&P 500 and Dow Jones Industrial Average were both flat on the day.

It’s a relatively muted reaction, given the importance of the earning call. Shares should move more on Thursday after investor digest all the detail from the company’s conference call 

Ahead of the call Tesla offered a couple of tidbits for investors.

Tesla’s new plants in Austin, Texas, and Berlin, Germany, were producing about 3,000 cars a week at the end of 2022. For Berlin, that’s up from about 2,000 cars a week at the end of the third quarter. Tesla didn’t have a weekly production number listed for Austin the last time it reported earnings.

Tesla also said its next generation vehicle platform is under development. That’s a lower price EV, something investors have been looking for. It will expand Tesla’s potential market.

CFO Zachary Kirkhorn said “customer interest remains high,” which is a sign demand is holding in after the price cuts. He added that cuts will impact profit margins without giving too many specifics. He did say margins “will remain healthy and industry leading.”

There have been many important earnings reports in the company’s history. The fourth quarter of 2022 might be the most important.

In 2010, Tesla reported its first full quarter as a publicly traded company, in which it generated about $31 million in sales from the original Roadster. There were the quarters when the EV pioneer started delivering the Model S—its first mass-produced car—in 2012, and the lower-price Model 3 in 2017. There was also the third quarter of 2019, when Tesla turned in a surprise profit.

As for this quarter, Tesla is now the most actively traded stock in the U.S. market and it faces a tougher economic environment, with rising interest rates, elevated inflation, and recession fears. In addition, EV competition continues to grow, and investors also are wary of Musk’s new role as owner of the social media platform Twitter.

The uncertainty around profit margins looms large for investors. For 2022, Tesla generated gross profit margins of about 26% from its automotive business. For full year 2023, after the price cuts, automotive gross profit margins projections should fall to anywhere from 17% to 22%.

Investors should be ready for trading volatility Thursday. Options markets imply the stock will move about 10%, up or down, following the earnings report. Shares have moved an average of about 8%, up or down, following the past four quarterly reports. Shares have risen twice and fallen twice over that span.

Through Wednesday trading, Tesla stock is up about 17% year to date. The Nasdaq Composite is up about 8%.

Write to Al Root at allen.root@dowjones.com