Tesla (TSLA:NASDAQ) is facing a stiff challenge to repair profitability as multiple price cuts this year threaten to leave a lasting mark on margins and the share price.

At the start of October (2 October) Tesla unveiled another round of discounts in the US, the seventh time this year that the world’s biggest electric car maker has lowered ticket prices on some models. Elon Musk’s aggressive pricing strategy was meant to boost sales in a slowing electric vehicle market and, crucially, put more miles between its industry leading profit margins and those of its legacy car maker and Chinese challenger rivals.

The strategy seemed to initially work, with vehicle deliveries hitting a near-record 423,000 in the first quarter of 2023 and jumping in the second quarter to 466,000. But price cuts’ ability to stimulate demand is now running out of juice.

Deliveries softened in the third quarter at 435,059 vehicles, partly because of planned temporary shutdowns at its gigafactories in Austin and Shanghai for upgrade work. That was shy of consensus analyst estimates of 461,640 vehicles, which were supposedly already recalibrated to reflect the manufacturing stoppages.

In turn this prompted some analysts to speculate that buyers might be delaying purchases in the hope that Tesla would continue to cut vehicle prices in the months ahead.

Following the third quarter results, investors now have tangible evidence of the savage impact this strategy is having on Tesla’s profitability. Gross margins declined for the fourth quarter in a row at 17.9%, falling from 25.1% in the equivalent quarter of 2022. Gross margins peaked in Q1 2022 at 29.1%, which implies a 1,120-basis point drop in 18-months.

This has left Tesla’s once market leading gross margins below some mass market rivals, such as Toyota (7203:TYO) and Volkswagen (VOW3:ETR), although these comparative figures include non-electric vehicles.

Tesla investors now face hard questions given that the share prices of mass market rivals typically trade on single-digit or low double-digit price to earnings multiples versus Tesla’s 60-odd.

Operating profit margins at Tesla have faced even deeper declines, more than halving in a year, down from 17.2% in the third quarter of 2022 to 7.6% in the same quarter this year. This means that despite largely higher vehicle volumes, quarterly net income has plunged 37% since September 2022 to $2.32 billion, or 44% to $1.85 billion on a GAAP basis (generally accepted accounting principles).

Even if analysts forecasts for operating profit margin recovery proves correct, consensus projections of 11.8% in 2024 and below 14% in 2025, means margins will remain roughly 300 basis points below 2022 levels two years from now.

Tesla shares have fallen more than 14% since the third quarter results were released to $212.08, their lowest since May 2023.

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