Tesla stock plummeted in pre-market trading on Thursday, falling more than 7% as the electric-vehicle maker reported gross margins below 20% for the first time in nearly three years.
The margin pressure comes after Tesla cut prices six times since the start of year in an attempt to reinvigorate demand.
“It’s difficult to say what the margin will be,” Tesla CEO Elon Musk said on the company's earnings call.
Tesla reported first quarter revenue of $23.33 billion, slightly below Street estimates of $23.35 billion, with adjusted earnings per share coming in at $0.85, below Street estimates of $0.86. As price cuts weighed on profits, Tesla reported net income of $2.9 billion, one billion less than the previous quarter and $700 million less than the same period a year prior.
In reaction to Wednesday's report, several Wall Street analysts have slashed their price targets on the stock, which had rallied more than 45% to start the year. While still bullish on the stock and maintaining a Buy rating, Jefferies cut its price target to $230 from $250, citing the company's shrinking margins as a primary concern.
"Q1 did not give great confidence on price elasticity or a gross margin floor given priority on volume over near term profitability," Jefferies wrote in a note to clients.
Tesla has ramped up production and deliveries of its electric vehicles over the last several quarter, delivering 422,875 units. But that has still outpaced demand, with the automaker producing about 20,000 more vehicles than it delivered in the first quarter.
"They're backed into a corner," Ronald Jewsikow, Guggenheim Securities Vice President – Automotive Equity Research told Yahoo Finance Live after Wednesday's report. "They put a lot of supply in place that needs to find a home. And the only tool they really have is cutting prices."
Longtime Tesla bull, Wedbush Dan Ives also cut his price target on the stock to $215 a share from $225 on the back of the tightening margins.
"Musk & Co. cut prices to further stimulate consumer demand in a shaky macro amidst rising EV competition globally in this EV arms race," Ives wrote in a note to clients after the release. "With no rose colored glasses: margins are now a delicate issue that are keeping Tesla investors up at night."
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