By Liam Denning
Tesla had two very different Q1 earnings announcements, depending on whether you care more about the numbers or the words. The numbers were bad. The words were dreamlike.
The big drop in first-quarter vehicle sales weighed on Tesla’s financials, released Tuesday night. Here’s the basic problem: Since Q2 2022, when Tesla’s revenue per vehicle rose to nearly $56,000 a piece, that average price has fallen by about $12,000, but manufacturing costs have fallen by less than 5,000 dollars. More than half of gross profit per vehicle is gone. (All these numbers do not include greenhouse gas credits).
This has an impact. Gross profit margins were subdued. Operating margins, meanwhile, collapsed to 5.5 percent, the lowest in three years and even lower than those of General Motors, which also reported results on Tuesday. Tesla is also making more vehicles than it has sold in the past two years, and last quarter’s overrun was by far the largest. As such, a huge shift in capital, fueled by inventories, nearly wiped out operating cash flow (Tesla expects that to reverse this quarter). The company reported its first quarter with negative free cash flow since the beginning of 2020.
To recap: Falling sales despite price cuts have squeezed margins and cash flow.
In addition, this month saw doubts cast over Tesla’s commitment to a new low-cost electric vehicle called the Model 2, signs that Tesla will focus on unproven robot taxis, a sudden loss of senior executives and the announcement of its largest round layoffs the company has ever made. Before the results, Tesla’s stock had fallen 42% so far this year — shedding about $329 billion in market capitalization — with a sharp slide this month.
The reason is that, with the promise of the Model 2 in doubt, it knocked out the central pillar on which expectations for Tesla’s future growth and profits rested. Even now, estimates project vehicle deliveries to rebound to nearly 530,000 in the fourth quarter of 2024, which would be a new record, and more than 140,000, or 37% higher, than the dismal quarter just gone. But with price cuts having so far failed to jump-start Tesla’s sales – quite the opposite – why are they expected to improve so much this year? And if not these vehicles, then what, the Cybertruck?
So Tesla had to send some messages. The announcement duly spoke to Tesla having updated its plans to “accelerate” the rollout of new vehicles, “including more affordable models” as soon as this year, well ahead of its schedule of starting production in late 2025. Therefore, no wonder the stock jumped more than 10% Tuesday after the market closed.
However, what did these words really mean? There was a curious shift in Tesla’s low-cost vehicle strategy in March 2023, when management talked about cutting costs in half with revolutionary manufacturing methods. Now, Tesla is talking about merging aspects of next-generation platforms with existing ones in its new models, allowing the company to build them on existing production lines. To be clear, this is an interesting feature, offering efficiencies to reduce persistent costs.
But also to be clear: It won’t be delivering a $25,000 Model 2 anytime soon — “this update may result in less cost reduction than previously expected” — and it’s also not what Tesla was talking about just about a year ago. This is a major review of the strategy that requires details.
In the related call, we learned from CEO Elon Musk that the new models may come as early as the end of this year. And yet … yet … questions about the details were ignored and then moved to the unveiling of the robotaxi that Tesla is planning for early August. So new models may be coming in Q4, but little to nothing can be expected until two months before Q4 starts. It’s also unclear exactly which models are being talked about now: updates of existing ones, a robotaxi platform, or a low-cost electric vehicle? The sudden announcement at the end of the call that Tesla’s head of investor relations, Martin Vieka, is moving, drawing attention back to recent executive departures, was unfortunate timing.
What was clear is that if anything remains at the heart of Tesla and Musk, it’s the robot taxi project. That theme dominated the call with investors, with Musk also making the usual references to artificial intelligence and the potential of Tesla’s Project Optimus humanoid robot to significantly boost economic growth. I felt there was more detail on this than there was on the cheap electric vehicle project. Despite the bullish reaction to the announcement, the central question of where Tesla’s next wave of growth will come from remains only partially answered, and that part relies on a great deal of faith in the absence of actual details. With vehicle numbers not looking great, robotaxis took center stage.
At one point, Musk said that “if someone doesn’t believe Tesla is going to solve autonomy, they shouldn’t invest in the company.” This is a statement we should remember.
