July 20 (Reuters) – Elon Musk is making a calculated bet: sacrifice margins now for better ones later when full self-driving software is completely integrated into Tesla cars. It’s a plan that could intensify the electric-vehicle price war and irk investors.
Shares of the automaker (TSLA.O) fell nearly 5% in early trading on Thursday after Musk signaled no end in sight for price cuts that have already sent gross margins to a four-year low.
“The short-term variances in gross margin and profitability really are minor relative to the long-term picture. Autonomy will make all of these numbers look silly,” Musk said.
To be sure, getting more cars on the road would help Tesla maintain its dominant U.S. market share in “turbulent times” and unlock precious usage data needed to train the artificial intelligence models behind its self-driving technology.
But investors are questioning whether it’s worth sacrificing current profitability for technology that has for years missed Musk’s targets to achieve full self-driving capability and is in the crosshairs of regulators after a number of crashes involving Tesla vehicles.
The billionaire believes full self-driving (FSD) could one day account for most of Tesla’s value and give it a cushion rivals lack as they try to turn their EV operations profitable.
“That margin outlook may be a disappointment for some, present company included, that were looking for margins to slowly improve this year,” said Gene Munster, managing partner at Deepwater Asset Management – a Tesla investor.
In the second quarter, the company’s automotive gross margin, excluding regulatory credits, fell to 18.1% from 19% in the first, according to Reuters’ calculation. It also marked a sharp decline from the 26% reported a year ago.
MILES AHEAD
Analysts said the margin weakness would likely weigh on the stock, which has more than doubled this year thanks to the growing adoption of the company’s charging system.
Yet, most were positive about Tesla, with more than seven analysts upgrading the stock on optimism about FSD after the company said it was in talks with a major automaker to license the technology.
“One of Tesla’s biggest assets is its substantial advantage in accumulated miles generated via its current FSD fleet that it can use to be the first to market with a truly autonomous vehicle driving system,” said John Tomlinson, Global Director of Research at research firm M Science.
Tesla saw a spike in the usage of FSD Beta in the second quarter, with cumulative miles driven with the technology coming in at more than 300 million miles.
“They’re not an AI play the way Microsoft or Nvidia is an AI play,” said Thomas Martin, senior portfolio manager at Tesla shareholder Globalt Investments.
“They’re more of an AI play the way a regular business is an AI play, except that this race to full self-driving has always been an AI issue, and it’s always been based on data. And I would like to see the capex spent that way.”
Tesla plans to spend over $1 billion through next year on Dojo, its supercomputer to train AI models for autonomous cars, which it said will go into production this month.
Still, many other challenges remain for the technology.
Wells Fargo analysts said FSD’s adoption could be impeded by its price, which Musk said was low. At $15,000 per car, the technology is about half the cost of the cheapest Tesla vehicle after a $7,500 federal tax credit.
“Without a crystal ball or having access to all the data Tesla has at its disposal, it is pretty impossible to guess when FSD will be achieved,” said Danni Hewson, head of financial analysis at AJ Bell.
“The real question is how long it would take to get sign-off from regulators, which is likely to take some time amid all the obvious safety concerns.”
Reporting By Peter Henderson, Aditya Soni, Akash Sriram and Zaheer Kachwala; Editing by Dhanya Ann Thoppil and Devika Syamnath
Our Standards: The Thomson Reuters Trust Principles.
