What kind of impact will the price reduction offensive have on Tesla's (TSLA) 1Q earnings?

The company's 2022 4Q (October-December) earnings, announced on January 25th, had a revenue of $24.32 billion, a 37% increase compared to the same period last year. Non-GAAP adjusted EPS increased by 40% to $1.19. Both revenue and adjusted EPS exceeded market expectations. The number of customer deliveries increased by 31% to 405,278 units. Among them, the Model 3/Y SUVs accounted for 388,131 units, while the Model S/X luxury sedans and SUVs totaled 17,147 units. In terms of revenue, the passenger vehicle department saw a 33% increase, absorbing the impact of exchange rate headwinds ($1.4 billion) with the rise in the ASP (average selling price) (nearly 10% increase in the USA). On the profit side, the gross margin of the passenger vehicle department decreased by 4.7 percentage points to 25.9% due to rising raw material prices. Adjusted EBITDA margin decreased by 0.9 percentage points to 22.2%.

According to the company's management guidance, in early 2021, the EV production target was set at an average annual increase of 50%. However, in 2022, the actual EV production (1,369,611 units) fell short of the target, with the EV production target for 2023 remaining at 1.8 million units, an increase of 31% compared to 2022. On the other hand, in order to mass-produce new batteries and EV trucks, the company has raised its annual facility investment amount from the previous $6-8 billion to $7-9 billion for 2024-2025. CEO Musk has revealed that depending on the recovery of the global supply chain, it is possible to achieve an annual production of 2 million units, in addition to the target of 1.8 million units in 2023.

During the company's 3Q earnings announcement in 2022, it was revealed that the production cost of the next-generation model Y would be reduced to about half of the previous cost. In October of the same year, the company started selling at a reduced price in the Chinese market. Since the beginning of this year, following significant price reductions in January in countries including the US and China, it was announced that EV price reductions will be implemented in March and early April. The company's relentless price reduction strategy has led to remarkable progress in the global market. According to the company's announcement on April 2nd, EV production in 1Q 2023 increased by 44% compared to the same period last year, reaching 440,808 units, while sales increased by 36% to 422,875 units. Both production and sales reached their highest levels on a quarterly basis.

In the early 2030s, the company set a goal of manufacturing "20 million units of EVs and EV trucks per year." In early April, the company announced the construction of a new energy storage mega-factory in Shanghai, specializing in the production of ultra-high-capacity energy storage batteries called Megapacks. The new mega-factory will be Tesla's second energy storage mega-factory in the world, with the first one currently operating in California, USA. The factory is expected to have an annual production capacity of 40 GWh, equivalent to 0.01 million units of Megapack batteries.