Tesla's (NASDAQ: TSLA) declining profit margins have become a cause of concern for investors. profit margins are arguably the most important financial metrics to follow because when they fall, it's often a signal that a company's competitive position is declining. They also have a massive impact on the long-term financial models that investors use to price growth stocks like Tesla. That said, there's reason to believe the electric vehicle (EV) maker's margins will recover.

The chart below shows the market's concern. Following three years of excellent gross profit margin and operating profit margin expansion, Tesla's margins are down sharply year to date. The trend appears even worse if you look at the sequential progression in quarterly operating profit margin, which has gone from 11.4% in the first quarter to 9.6% in the second quarter and just 7.6% in the third quarter.

It doesn't take much to imagine the negative impact falling margins can have on Tesla's long-term valuation, especially if you pencil in the third quarter's operating margin of 7.6%, and contrast that with the 16.8% margin for all of 2022.

Continue reading

Source Fool.com