Tesla Inc.’s profit margins are falling. Amid massive price cuts, that was almost all investors and analysts wanted to talk about after the electric car company released earnings on Wednesday. Tesla
TSLA
CEO Elon Musk had an answer to ease everyone’s fears, though: Don’t worry, full autonomy is almost here and you’ll solve the margin problem.
Musk has been making absurd predictions about the arrival of self-driving cars for several years now, including the infamous prediction in 2019 that Tesla cars would be more valuable than what consumers paid for them because they would transform into a fleet of automated robots in the near future. Whereas everything that has happened since then continues to show that Tesla’s Autonomy Day 2016 show wasn’t up to parMusk continues to promote his favorite fantasy.
“We expect our cars over time to be able to generate significant profits with autonomy. So we think we’re laying the groundwork here and it’s better to ship a lot of cars with a lower margin and then make a higher margin in the future, because we’re fully autonomous,” Musk said. “This is a very important point.”
Tesla stock fell 3% to 4% in after-hours trading prior to the call, and fell to 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 such autonomy will be here in a matter of months.
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“There will be 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 will do it this year.”
This wasn’t what investors wanted to hear, as question after question focused on margins. With the double whammy of increasing competition with new electric cars from big automakers, along with a soft economy and rising interest rates, Tesla has slashed prices on various models and in different markets about five times so far this year alone. This sent GAAP gross margins down to 19.3%, down from 29% in the same quarter last year.
Most of the questions on the company’s call were about profit margins or pricing, as one investor tried to get a sense of what investors can expect for gross margins in 2023, excluding tax breaks. The answers from Musk and other executives were vague beyond the fanciful response to autonomy.
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“This is a difficult environment to make forecasts like this,” Tesla CFO Zachary Kirkhorn said in a long-running answer that didn’t include much, if any. There is a lot of total uncertainty. There are also headwinds and tailwinds. And that’s basically a question, I think, asking our view of where the costs are going to go.”
Tesla investors have been down this road before with Musk and his predictions about self-driving, so they should know how to ignore his predictions now. But if Musk’s pipe dream is the only concrete answer Tesla has to restore its margin profile and that’s the underlying reason for an out-of-control valuation with the auto sector, Tesla stock could be even lower.
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