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Tesla loses luster for investors despite soaring sales

Less US tax credits for EVs and high Chinese tariffs weigh on profit margin

NEW YORK -- Shares in U.S. electric vehicle maker Tesla Motors are falling sharply due to growing concern over shrinking profit margins.

Sales soared 60% on the year in the April-June quarter, but profits fell far below the company's forecast due to higher sales of its Model 3 compared to other models, the automaker said on Wednesday.

Tesla hoped the Model 3 would accelerate growth, but has struggled to turn a profit due to the car's low price.

The disappointing earnings call pushed Tesla shares down in after-hours trading on Wednesday. The stock closed the day at $264.88 -- up 1.8% from Tuesday -- but plunged as much as 12% after results were reported.

Sales jumped 59% on the year to $6.34 billion in the quarter, but were lower than QUICK FactSet's expected bounce of 62% to $6.47 billion.

Gross profit margin was down 1.7 percentage points from a year earlier to 18.9%, below the company's full-year estimate of 25%. Profit per share, excluding extraordinary items, showed a loss of $1.12, more than market estimates of a 0.35 cent loss.

Losses were partially blamed on Tesla's changing sales mix. While quarterly shipments surged 130% from a year earlier to 95,356 units, 81% -- or 77,634 vehicles -- were low-cost Model 3s. Total shipments marked a sharp increase from the 45% recorded a year earlier, but those of high-margin Model S and Model X cars fell 21% on the year to 17,722 units.

Lower Model 3 prices also weighed on profitability. Sticker prices stood at about $50,000 in the quarter, down 10% from the same period last year, according to QUICK FactSet.

Tax credits for EV purchasers in the U.S. were reduced this year, apparently forcing Tesla to slash Model 3 prices. The credits are expected to end in 2020.

Tesla also lowered the price for Model 3s bound for China to lessen the burden of the country's high tariffs.

The percentage of Model 3s in Tesla's sales mix is likely to rise unless demand for higher-end models picks up.

According to materials released by the company on Wednesday, Tesla has backed-off from its previous forecast of a 25% full-year gross margin rate, possibly because profitability remains out of reach.

As for sales in China, earnings could pick up when Tesla's Shanghai factory goes online, since vehicles assembled and sold in China are not subject to tariffs. The factory is scheduled to start operations in the October-December quarter, and is key to the automaker's success in the country.

Tesla will have to reduce capital investments as well as increase sales of its luxury models. The company plans to launch the Model Y -- a relatively expensive SUV -- in the second half of next year.

Whether these measures can improve Tesla's bottom line is unknown. Investors have recently been bullish about the company, but this sentiment could fade fast if Tesla cannot pull itself into the black.

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