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MarketWatch First Take: Tesla rides higher prices to fatter profit, as Elon Musk complains about costs

Tesla Inc. reported a stunning first quarter with fat profits Wednesday, driven by prices that have grown steadily along with demand for electric vehicles and supply issues throughout the automotive sector.

Tesla raised prices on its electric vehicles in March, and that was not a one-off: Pro-Tesla blog Electrek wrote then that “in 2021, Tesla made so many price increases that we have lost count.” The result was $3.6 billion in operating profit and 81% revenue growth in the first quarter, with Tesla citing higher average selling prices as the no. 2 reasons for those gains in its investor presentation Wednesday, after only increased deliveries.

“Higher pricing continues to positively impact our financials as we make progress delivering cars in our growing backlog,” Chief Financial Officer Zachary Kirkhorn said near the beginning of his opening remarks.

For a company that long ran on losses, the profit is even more stunning. Chief Executive Elon Musk — who previously made getting electric cars to an affordable level a central goal — seemed defensive when talking about the company’s much higher prices, though.

“It may seem like maybe we’re being unreasonable about increasing the prices of our vehicles, given that we had record profitability this quarter,” he said. “But the waitlist for our vehicles is quite long,” he added, suggesting that the price will be more reasonable by the time consumers receive their vehicles in six months to a year.

Musk blamed the price increases on higher costs, though those certainly did not show up on the balance sheet, where Tesla put up record profit margins. Tesla’s operating margin hit 19.2%, more than triple last year’s performance and a healthy jump from 14.7% in the previous period, while automotive gross margin topped 30% for the first time without the help of regulatory credit sales.

“In some cases, we’re seeing suppliers request 20% to 30% cost increases for parts from last year to the end of this year,” Musk said in defending the increase. “So there’s a lot of cost pressure there. That’s why we raised our prices, because when things are this uncertain with respect to inflation, which we know is high, and we’ve got orders that go out a year or more in some cases, then we have to anticipate those cost increases.”

In this way, Tesla and Musk are no different than other large companies and executives. Amid inflation unlike anything the U.S. has experienced in decades, large companies put up profit margins that the world has never seen in 2021, even as executives publicly fretted about increased costs for workers and goods.

Musk had a lot of excuses and dodges when asked about pricing Wednesday. When an investor asked about his original goal to make the Model 3 an affordable electric vehicle that would spur wide electric-vehicle adoption, Musk eventually pivoted to claiming that Tesla’s far-away robotaxis will cost less than a subway ride or bus ticket.

“Robotaxi and autonomy, I think will end up providing consumers with by far the lowest cost per mile of transport that they’ve ever experienced,” he said. “It’s really quite substantial.”

Musk claimed robotaxis well be produced in 2024, but he also again said that Tesla will make it to full self-driving next year — a claim he makes every year that should remind anyone not to trust Musk on timelines. Musk said he hopes not to increase prices further, and to eventually lower prices again, but the same doubts are necessary.

Costs could conceivably cut into margins later this year. Semiconductors are in short supply and the profit margins in that sector also suggest large price increases, and the same is true of raw materials like lithium, which is used in batteries. While Musk pointed out that lithium ore itself is in plentiful supply, there is a shortage of companies that can refine lithium ore and turn it into the kind of lithium that can be used in a battery cell.

However, it’s also feasible that Tesla’s margins could grow even larger in the next quarter, when the latest price hikes kick in for the full period. That would be good for Tesla investors, though the chief executive will continue tofind it hard to pair the fatter margins with his previous rhetoric.

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