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How Tesla’s Gross Margin Might Look in Q1 2019

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Tesla’s first-quarter earnings

Wall Street analysts’ consensus estimate for Tesla’s (TSLA) first-quarter total revenue reflects their expectation of a slowdown in the company’s revenue growth rate.

Sequential weakness in Tesla’s car deliveries in the first quarter could be the primary reason for analysts’ weaker revenue estimate.

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Recap of Tesla’s fourth-quarter gross margin

In the fourth quarter of 2018, Tesla’s consolidated gross profit fell 5.3% sequentially to $1.44 billion, but it rose 228.8% from $439 million in the fourth quarter of 2017.

With this, the company’s fourth-quarter consolidated GAAP (generally accepted accounting principles) gross margin contracted to 22.8% from 25.0% in the third quarter. However, this gross margin reflected a significant improvement from 16.2% in the fourth quarter of 2017.

Tesla reported a 24.3% GAAP gross margin in its Automotive segment in the fourth quarter, lower than 25.8% in the third quarter but better than 18.9% in the fourth quarter of 2017.

Estimates for Tesla’s first-quarter margin

Analysts expect Tesla’s adjusted consolidated gross profit to be $898.6 million in the first quarter, reflecting a solid 89.3% YoY (year-over-year) increase. The company’s adjusted gross margin is likely to be 17.2% in the first quarter this year, lower than its adjusted gross profit margin of 20.0% in the fourth quarter of 2018 but better than its margin of 13.9% in the first quarter of 2018.

Tesla expects to achieve a 25% gross margin on the Model 3 in the long run. Note that generating profits from electric vehicles isn’t easy, primarily due to the high costs associated with the battery packs. Tesla exclusively produces electric vehicles, unlike other mainstream auto giants (XLY) such as Ford Motor Company (F), General Motors (GM), and Fiat Chrysler Automobiles (FCAU), which primarily produce gasoline vehicles. Gasoline vehicle sales give mainstream automakers an advantage, as they can use their profits from gasoline vehicle sales to fund their electric vehicle development.

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