Tesla’s Gross-Profit Margin Is the Next Big Sticking Point

Over the past four quarters,
Tesla
‘s automotive gross-profit margin—excluding any benefit from regulatory credits— has averaged 28%, which is 19 percentage points better than
Ford Motor
(F) and 13 percentage points better than
Toyota Motor
(TM).

Both sides realize the gross-profit margin is pulling in. But a risk for the bulls is that estimates for the number aren’t coming in fast enough.

Analysts project a fourth-quarter margin of 25%, down from the third- quarter’s margins of almost 27%. Automotive gross-profit estimates for the first quarter and full year are now 22% and 23%, respectively.

Those figures are too high, according to an analyst who is a Tesla bull. New Street Research’s Pierre Ferragu, who rates the stock Buy and has a $320 price target, projects margins of 20% for the first quarter and 22% for the full year.

Ferragu expects Tesla management to “talk down” margins when the company reports fourth-quarter numbers on Wednesday. The message might pressure shares, but Ferragu expects things to improve throughout the year as costs fall.

“We see strong tailwinds delivering a better sequential trajectory than what consensus implies,” wrote Ferragu in a Tuesday report.

The analyst cited the ramp-up of production at Tesla’s new manufacturing plants in Texas and Berlin. More vehicles produced means better absorption of Tesla’s fixed costs in those locations. He also pointed out that Tesla typically cuts per-unit costs by 5% to 10% a year as it gets better at manufacturing vehicles.

Exactly what Tesla will say about margins is hard to predict. Even harder to guess is how the stock will react to both the number and any margin guidance.

On Tuesday, trading was muted ahead of the earnings news. Shares closed up 0.1% at $143.89. The
S&P 500
was down about 0.1%; the
Dow Jones Industrial Average
closed up 0.3%.

Tesla has had a wild 2023 so far. Shares dropped 12.2% on Jan. 1 after fourth-quarter delivery volumes fell short of expectations. Tuesday, they were up about 17% for the year. The stock has rallied more than 40% since hitting a 52-week low on Jan. 6.

The Wednesday earnings report should bring more volatility and more fodder for bulls and bears to argue about. Wall Street is looking for earnings per share of about $1.15, up from $1.05 reported in the third quarter of 2022.

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