Opinion: As Tesla margins tank, Elon Musk again points to self-driving as a future savior
Tesla Inc.’s profit margins are falling amid massive price cuts, and that was almost all investors and analysts wanted to talk about after the electric car company posted earnings on Wednesday. Tesla
TSLA
However, CEO Elon Musk had an answer to ease everyone’s worries: Don’t worry, full autonomy is almost here and will solve the margin problem.
Musk has been making ludicrous predictions about the arrival of fully autonomous vehicles for several years now, including the infamous forecast in 2019 that Tesla’s vehicles would be worth more than consumers paid for them because they would transform into a fleet of robotic axes in the near future. While everything that has happened since then continues to show that Tesla̵[ads1]7;s 2016 Autonomy Day presentation was not up to par, Musk continues to push his favorite fantasy.
“We expect that over time our vehicles will be able to generate significant profits through autonomy. So we think we’re laying the groundwork here, and that it’s better to ship a large number of lower-margin cars and then reap a higher margin in the future as we perfect the autonomy, said Musk.- This is an extremely important point.
Tesla shares, down 3% to 4% in after-hours trading heading into the call, fell to declines of more than 6% between the end of the conference call and the end of the after-hours trading session. Perhaps because investors saw the disconnect between Musk admitting that progress toward autonomy is uneven, while saying — as he has for years — that autonomy will be here in a matter of months.
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“There will be a bit of two steps forward, one step back between releases, for those trying the beta,” he said. “But the trend is very clear towards full self-driving, towards full autonomy. And I hesitate to say this, but I think we’re going to do it this year.”
That’s not what investors wanted to hear, as question after question focused on margins. With a double whammy of increased competition with new electric cars from the major car manufacturers, combined with a soft economy and rising interest rates, Tesla has dropped prices on various models and in various markets about five times so far this year alone. That led to a drop in GAAP gross margins to 19.3%, down from 29% in the year-ago quarter.
Most of the questions on the company’s call were about profit margins or prices, with one investor trying to get a sense of what investors could expect for gross profit margins in 2023, excluding tax credits. The responses from Musk and other executives—beyond the imaginative autonomy response—were murky.
Full earnings coverage: Tesla shares fall 6% as price cuts hit profit margins
“This is a difficult environment to make projections like this,” Tesla CFO Zachary Kirkhorn said in a long-winded response that didn’t include much, if any, specifics. “There is a lot of macro uncertainty. There are also headwinds and tailwinds. And this is really a question, I think, that asks about our view of where the costs will go.”
Tesla investors have been down this road before with Musk and his self-driving predictions, so they should know to dismiss his prediction by now. But if Musk’s pipe dream really is the only concrete answer Tesla has to restore a margin profile that is at the core of a valuation out of step with the auto sector, Tesla stock could have much longer to fall.
