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Tesla (TSLA) delivered a big beat over Wall Street estimates when the company reported second quarter earnings after the close on July 19. The company reported earnings of 91 cents a share, well above the Wall Street projection of 80 cents a share.

But in after hours trading, the stock still fell by 4.20%. Then on, July 20, the shares were down 7.17% as of 10:45 a.m. New York time.
And this comes despite another record quarter of unit sales.

The problem? Falling margins continue to worry investors. In the second quarter gross profit margins, excluding regulatory credits, came in at 18.1%. That was only a slight dip from the 18.3% gross margins in the first quarter. But that first quarter gross profit margin was down 11 percentage points year over year. So no recovery visible there.

Total gross margins came in at 18.2%, down from 19.3% in the first quarter and a drop of 682 basis points from the second quarter of 2022.

The company had previously flagged 20% gross margins as a floor in margins for this trough.

Tesla reported record global deliveries in early July thanks to price cuts, tax credits and discounts. Tesla deliveries were 466,140 in the second quarter. That’s above the then-record first quarter deliveries of 422,875. Tesla’s global vehicle inventory was 16 days at the end of the second quarter, up one day sequentially from the end of the first quarter and a 300% increase vs. last year. (Rising inventory is a negative indicator for future selling prices and profit margins.) Elon Musk said Wednesday during the earnings call that the company is still targeting production of 1.8 million vehicles in 2023. That’s below the 2 million production target Musk touted at the end of the fourth quarter.

The Tesla CEO told investors to look past the current margin decline. Musk said selling more cars is more important than profit margins per car, and that the company will make big money selling autonomous driving software across all Tesla vehicles.

In other words higher margins tomorrow (or so given the continued problems with Tesla’s autonomous driving software.)

Tesla shares were up 136% for 2023 to date as of the close on July 19.