Why Tesla Plunged 20.8% in April

What happened

Shares of Tesla (TSLA 5.50%) fell by 20.8% in April, according to data provided by S&P Global Market Intelligence.

This fall may have taken some of the wind out of the electric car company’s sails, but its shares are still up 52% year to date.

Image source: Getty Images.

So what

Tesla released a disappointing set of earnings for its fiscal 2023 first quarter. Although total revenue climbed 24% year over year to $23.3 billion, gross profit took a hit, declining by 17% year over year to $4.5 billion as gross margin shrank from 29.1% a year ago to 19.3%. With operating expenses dipping by just 1% year over year, operating and net income tumbled by 26% and 24% year over year, respectively. To make things worse, Tesla also saw its free-cash-flow generation plunge 80% year over year to $441 million from $2.2 billion in Q1 2022. 

Investors were probably also spooked by the continued rise in interest rates as the U.S. Federal Reserve continued raising rates in March to a range of 4.75% to 5%. Remember that cars are usually sold bundled with a loan, and this rise in rates makes such loans more expensive, thus dampening demand for large purchases. Tesla’s business will be directly impacted as higher rates translate to weaker demand with more consumers holding back and tightening their purse strings. It doesn’t help that inflation remained elevated, counting as an additional factor in holding people back from spending.

Now what

Earlier this month, the central bank continued hiking rates by raising interest rates for a 10th consecutive time to a range of 5% to 5.25%. This move may worsen consumer demand and make people cut back even more from purchasing a Tesla vehicle.

In response, Tesla has been cutting the prices of its Model Y and Model 3 vehicles in the U.S. over six consecutive occasions to make prices more palatable and stimulate demand. This move was done at the expense of its gross margin, which saw a sharp reduction during the quarter. Tesla did reverse this policy of price reductions by hiking prices in key markets such as the U.S. and China earlier this month, but most of the damage had already been done as consumers now expect prices to remain low and may balk at price increases.

Despite these setbacks, Tesla did report encouraging growth in its vehicle production and deliveries for the quarter. Total production for Q1 2023 jumped 44% year over year to 440,808 while total deliveries increased by 36% year over year to 422,875. Tesla’s physical footprint also continued to grow with 1,000 Tesla locations around the world, 27% more than a year back, along with a 33% year-over-year increase in supercharger stations.