Before the Bell: Tesla's Disappearing Margins Are Part of the Plan, but Markets Scowl Anyway

Premarket action on Thursday had the three major U.S. indexes trading lower. The Dow Jones industrials were down 0.38%, the S&P 500 down 0.65% and the Nasdaq 0.93% lower.

Seven of 11 market sectors closed lower on Wednesday. Materials (−0.31%) and energy (−0.25%) posted the day’s biggest losses. Utilities (0.78%) and real estate (0.55%) put up the best gains. The Dow closed down 0.23%, the S&P 500 down 0.01% and the Nasdaq up 0.03% on Wednesday.

Two-year Treasuries added five basis points to end Wednesday at 4.24%, and 10-year notes rose by two basis points to close at 3.6%. In Thursday’s premarket, two-year notes were trading at around 4.20% and 10-year notes at about 3.57%.

Wednesday’s trading volume was slightly below the five-day average. New York Stock Exchange losers outpaced winners by 1,580 to 1,399, while Nasdaq decliners led advancers by about 8 to 7.

Before U.S. markets open on Thursday, these 36 companies are scheduled to report quarterly results.

The U.S. Bureau of Labor Statistics releases its weekly report on new and continuing claims for unemployment benefits Thursday morning. Economists are looking for an increase of 3,000 in new jobless benefit claims to 242,000. Two weeks ago, continuing claims totaled 1.81 million.

Existing home sales for March are due out at 10:00 a.m. on Thursday. The report from the National Association of Realtors is expected to show a decline in the seasonally adjusted annual rate of sales to 4.5 million.

Wednesday’s best performer among S&P 500 companies was First Republic Bank (NYSE: FRC), which added 12.4% to its share price. The company had no news but rode the wave of optimism for regional banks created by Western Alliance’s upbeat earnings report. First Republic reports quarterly results late on Monday.

CDW Corp. (NASDAQ: CDW) dropped 13.23% after announcing late Tuesday its preliminary revenue total for the March quarter. The tech distribution company expects revenue of $5.1 billion, 3.4% lower than analysts had forecast and 14.3% below the year-ago quarter. CDW also said full-year earnings per share would be “modestly below full-year 2022.”

After reporting earnings late Wednesday, Las Vegas Sands Corp. (NYSE: LVS), which no longer owns a casino in Las Vegas, reported earnings and revenue well above Wall Street estimates. Traffic to its Singapore and Macau casinos picked up in March, and the company said it expects the increase to continue. Revenue more than doubled year over year to $2.1 billion, and the stock traded up more than 5% in Thursday’s premarket.

Tesla Inc. (NASDAQ: TSLA) dropped 2% on Wednesday and traded down another 6.7% in Thursday’s premarket session after reporting quarterly results that met earnings expectations and were a bit short on revenue. Investors reacted more strongly to a sharp decline in gross margin, from 26.8% in the first quarter of last year to 18.3% in the March quarter.

The company has dropped the price of some models several times since the beginning of the year, but Tesla neither makes excuses for the drops nor makes promises to end them:

Our near-term pricing strategy considers a long-term view on per vehicle profitability given the potential lifetime value of a Tesla vehicle through autonomy, supercharging, connectivity and service. We expect that our product pricing will continue to evolve, upwards or downwards, depending on a number of factors.

Although we implemented price reductions on many vehicle models across regions in the first quarter, our operating margins reduced at a manageable rate. We expect ongoing cost reduction of our vehicles, including improved production efficiency at our newest factories and lower logistics costs, and remain focused on operating leverage as we scale.

Revenue from the company’s energy storage and power generation segment rose by nearly 150% year over year to $1.53 billion, and service revenue rose 44% to $1.84 billion. Automobile sales and leasing revenue rose 18% to $19.96 billion.

Service revenue includes the $15,000 that Tesla charges buyers for its full self-driving (FSD) beta software. CEO Elon Musk believes that FSD software has tremendous value. When it will be ready to roll out to everyone remains a serious question, however. And when it will truly be fully self-driving in the eyes of regulators is an even bigger question.

In its outlook, Tesla said it expects to sell about 1.8 million vehicles in 2023, ahead of its long-term plan to grow volume at a 50% compound annual growth rate. In 2022, the growth rate was 31%. Tesla also commented that it would rather increase volume and give up operating margin.

Tesla is “on track” to begin production of the Cybertruck later this year at its factory in Texas.

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