Musk sells the Tesla dream, but don't ask for details

By Liam Denning

Tesla Inc. had two very different first-quarter results announcements depending on whether you’re more into the numbers or the words. The numbers were bad. The words were dreamy.

But it was the lack of words on the subsequent call that spoke volumes.

The first quarter’s bombshell drop in vehicle sales sent predictable shockwaves through Tesla’s financials, published Tuesday evening. The basic problem is as follows: Since the second quarter of 2022, when Tesla’s revenue per vehicle rose to almost $56,000 apiece, that implied average price has dropped by about $12,000 but the cost of manufacturing has fallen by less than $5,000. More than half the gross profit per vehicle has vanished. (All these numbers exclude greenhouse gas credits).

Musk's Margins

This has knock-on effects. Gross profit margins were subdued. Operating margins, meanwhile, were crushed to 5.5 per cent, the lowest level in three years and even lower than those of General Motors Co., which also reported Tuesday. Tesla has also been building more vehicles than it has sold for most of the past two years, and last quarter’s excess was the biggest by far. Hence, a massive working capital swing, boosted by inventories, all but wiped out operating cash flow (Tesla expects this to reverse in the current quarter). The company reported its first quarter of negative free cash flow since early 2020.

So, to recap: falling sales despite price cuts have slashed margins and cash flow.

In addition, this month has seen doubts raised about Tesla’s commitment to a new low-cost EV dubbed the Model 2, indications that Tesla will instead focus on unproven robotaxis, the sudden loss of senior executives and the announcement of the company’s biggest ever round of layoffs. Prior to the release of results, Tesla’s stock was down 42 per cent so far this year — losing about $329 billion of market cap — with a pronounced slide this month.

The reason is that, with the promise of the Model 2 thrown into doubt, that kicked away the central pillar on which expectations of Tesla’s future growth and earnings rested. Even now, the consensus has vehicle deliveries rebounding to almost 530,000 in the fourth quarter of 2024, which would be a new record, and more than 140,000, or 37 per cent higher, than the dismal quarter just gone. Yet with price cuts having failed thus far to spur a jump in sales of Tesla’s ageing lineup — quite the opposite in fact — why is that expected to improve so much this year? And if not those vehicles, then what, the Cybertruck?

So Tesla needed to stiffen spines out there. The announcement duly talked about Tesla having updated its plans to “accelerate” the launch of new vehicles, “including more affordable models,” ahead of the prior target start date of the second half of 2025. Well, no wonder the stock — still trading at almost 50 times forward adjusted earnings, mind — jumped by more than 10 per cent after the market closed.

Yet what did those words really signify? There was an odd tweak to the low-cost vehicle strategy Tesla laid out in March 2023, when management talked about cutting costs in half with revolutionary manufacturing methods. Now, Tesla talks about melding aspects of next-generation platforms with its existing ones in the new models, enabling the company to build them on existing manufacturing lines. To be clear, that is an intriguing possibility, offering efficiencies to reduce stubborn costs.

But also to be clear: It won’t deliver a $25,000 Model 2 anytime soon — “this update may result in achieving less cost reduction than previously expected” — and also isn’t what Tesla talked about only a year or so ago. It is a major overhaul of strategy requiring details.

Ah yes, that’s what the call is for. On the call, we learned from Chief Executive Elon Musk that new models might arrive as early as late this year. And yet … yet … questions about the details were brushed off and then pushed off to the robotaxi unveiling Tesla plans for early August. So, new models maybe in the fourth quarter but little to nothing can be expected until two months before the fourth quarter begins. It is also unclear exactly which models are being talked about now: updates to existing ones, a robotaxi platform or a low-ish cost EV? The sudden announcement at the end of the call that Tesla’s investor relations chief Martin Viecha was moving on, drawing attention back to recent C-suite departures, was unfortunate timing.

What was clear is that, if anything remains top of Tesla’s mind, and Musk’s, it is the robotaxi project. This theme dominated the call, with Musk also making the customary diversions into artificial intelligence and the potential for Tesla’s Optimus humanoid robot project to spur effectively infinite growth in the economy. It felt like there were more details on that than the cheap EV project. Despite the bullish reaction to the announcement, the central question as to where Tesla’s next growth wave will originate remains only partly answered, and that part relying on a large measure of faith in the absence of real detail. With the vehicle numbers not looking great, the robotaxi thesis is front and center.

At one point, Musk said that “if someone does not believe Tesla will solve autonomy, they should not be investing in the company.” Words to live by.