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Why Tesla’s Gross Margin Could Improve in the Second Half

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Aug. 3 2018, Updated 3:05 p.m. ET

Second-quarter gross margin

In the second quarter, Tesla’s (TSLA) consolidated gross profit stood at $619 million, down 7.2% from $667 million in the second quarter of 2017 and up 35.6% from $457 million in the first quarter this year.

With this, the company’s second-quarter consolidated GAAP (generally accepted accounting principles) gross margin expanded to 15.5% from 13.4% in the first quarter. However, it reflected a significant contraction from 23.9% in the second quarter of 2017.

As was the case with its revenue, Tesla’s second-quarter consolidated gross margin was better than analysts’ estimate of 13.6%.

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Model 3 margin in positive territory

In the second quarter, Tesla’s GAAP gross margin for its Automotive segment was 20.6%, better than its level of 19.7% in the first quarter but worse than its level of 27.9% in the second quarter of 2017.

In the second quarter, the gross margins of its Model S and X expanded on a sequential basis. Reductions in Model S and Model X material and manufacturing costs helped the company expand the gross margins of its two premium cars.

In the last few quarters, Tesla’s Automotive segment’s margin has contracted primarily due to its Model 3 production ramp-up phase. On the bright side, Tesla’s gross margin for the Model 3 was positive in the second quarter for the first time. The company expects its Model 3 gross margin to expand going forward, and it’s targeting a level of 15% in the third quarter with the help of a faster production process and improved efficiency.

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At a time when US passenger car sales are weakening, the auto industry is becoming more focused on protecting profit margins. Legacy automakers (XLY), including Ford Motor Company (F), General Motors (GM), and Fiat Chrysler Automobiles (FCAU), have increased their efforts to drive manufacturing efficiencies to improve their margins in the last couple of years.

Gross margins of other segments

In the second quarter, Tesla’s Energy Generation and Storage segment’s gross margin expanded to 11.8% from 8.5% in the previous quarter. The company attributed this margin expansion mainly to “a higher mix of more profitable solar deployments.”

Read on to the next article, where we’ll take a quick look at some other key highlights of Tesla’s second-quarter earnings event.

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