Tesla Inc.’s profit margins are shrinking amid massive price cuts, and that’s about all investors and analysts wanted to talk about after the electric-vehicle company released its earnings on Wednesday. However, Tesla TSLA Chief Executive Elon Musk had a response to allay everyone’s concerns: Don’t worry, full autonomy is almost here and will solve the margin problem.
Musk has been making ridiculous predictions about the arrival of fully autonomous vehicles for a number of years, including the infamous 2019 prediction that Tesla’s vehicles would be worth more than consumers paid for them because they would morph into a fleet of robo-taxis in the near future . While everything that’s happened since continues to show that Tesla’s Autonomy Day 2016 presentation wasn’t up to par, Musk keeps pushing his pet fantasy.
“We anticipate that over time our vehicles can make significant gains through autonomy. So we think we’re laying the groundwork here and that it’s better to ship a large number of cars at a lower margin and then reap a higher margin in the future as we perfect the autonomy,” Musk said. “This is an extremely important point.”
Tesla stock, which was down 3% to 4% in after-hours trading before the earnings call, fell to over 6% between the end of the earnings call and the end of the after-hours trading session. Perhaps because investors have seen the disparity between Musk admitting that progress towards autonomy has been 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 little bit of two steps forward and one step back between releases for those trying out the beta,” he said. “But the trend is clearly towards full self-driving, towards full autonomy. And I hesitate to say that, but I think we will do it this year.”
Investors didn’t want to hear that, because question after question revolved around margins. With a double whammy of increased competition from new electric vehicles from the big automakers, combined with the weak economy and rising interest rates, Tesla has cut prices on various models and in various markets about five times so far this year alone. This resulted in a decline in GAAP gross margins to 19.3% from 29% in the year-ago quarter.
Most of the questions on the company’s conference call were related to profit margins or pricing, with one investor trying to get an idea of what investors could expect for gross profit margins in 2023 excluding tax credits. Beyond the fanciful autonomy response, the responses from Musk and other executives have been murky.
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“This is a difficult environment to make projections like this,” said Zachary Kirkhorn, Tesla’s chief financial officer, in a lengthy response that didn’t offer much, if anything, concrete. “There is a lot of macro uncertainty. There are also headwinds and tailwinds. And that’s basically a question, I think, asking about our perspective on where the costs are going to go.”
Tesla investors have been down this path with Musk and his predictions about self-driving before, so know that you’ll have to scrap his prediction by now. But if Musk’s pipe dream really is the only concrete answer Tesla has to restore a margin profile that’s the main reason for a valuation that’s misaligned with the auto sector, Tesla stock could fall much further.