Tesla's third-quarter gross margin shrank from a year earlier, slightly missing Wall Street estimates, as the electric automaker slashed prices to boost demand in the face of higher interest rates.
Tesla stock drops 4.24% in after-hours trading.
But the company on Wednesday stuck to its annual production target of 1.8 million vehicles, suggesting the discounts were driving demand. Some analysts said Tesla may need to cut prices further to achieve its annual delivery target amid a broader slowdown in electric vehicle demand.
Tesla also missed analysts' expectations for third-quarter revenue and profit. It said its margin had taken a hit from the underutilization of new factories and an increase in operating expenses driven by its upcoming Cybertruck model, spending on artificial intelligence and other projects.
Tesla's average revenue per unit declined by nearly 11% from a year earlier.
The company said it has begun pilot production of the Cybertruck at its Texas Gigafactory, with the first deliveries scheduled for Nov. 30.
The company has since January resorted to steep price cuts and discounts, including reductions of more than 6% across models in the third quarter, to propel sales at a time when overall demand is under pressure.
While those efforts drove up sales in the first half of the year, planned factory retooling to prepare for production of new models throttled Tesla's deliveries between July and September.
Investors and analysts expect more price cuts as the automaker aims to deliver a record 476,000 vehicles in the fourth quarter to meet its annual target.
Still, Tesla's stock has more than doubled this year as investors bet the company will fare better than rivals in an uncertain economy and get a long-term margin boost from its self-driving software. The company's shares fell 2% in extended trading on Wednesday before cutting losses to trade up 0.2%.
The company reported a gross margin of 17.9% for the quarter ended September, compared with 25.1% a year earlier, when it had yet to start the price cuts. Margins fell despite a roughly $2,000 per vehicle reduction in raw material costs in the past quarter.
In the second quarter, Tesla had posted a gross margin of 18.2%.
Wall Street had on average expected Tesla to post a margin of 18.02%, according to 21 analysts polled by Visible Alpha. According to LSEG data, an average of 17 analysts polled expected gross margin of 18.25%.
"While production cost at our new factories remained higher than our established factories, we have implemented necessary upgrades in Q3 to enable further unit cost reductions. We continue to believe that an industry leader needs to be a cost leader," Tesla said in a statement.
Tesla said its energy business, which sells solar panels and batteries, as well as its services business, had become a meaningful contributor to profit with more than $500 million in combined gross profit in the quarter.
Revenue in the third quarter rose 9% to $23.35 billion, compared with analysts' estimates of $24.1 billion. That marked the slowest pace of growth in more than three years.
On an adjusted basis, Tesla earned 66 cents per share. Analysts had expected a profit of 73 cents per share, according to LSEG data. It was not immediately clear if the numbers were comparable.