May 28, 2024

Tesla Inc.’s profit margins are declining amid massive price cuts, and that was almost all that investors and analysts wanted to talk about after the electric-vehicle company released earnings Wednesday. Tesla

Chief Executive Elon Musk had an answer to ease everyone’s concerns, though: Don’t worry, full autonomy is almost here and will solve the margin issue.

Of course, rational people know that is not the truth, and Tesla’s stock price fell more as the call ended, with that as basically the only answer to legitimate concerns about the EV maker’s changing margin profile.

Musk has been making ridiculous predictions about the arrival of fully autonomous vehicles for several years now, including the infamous forecast in 2019 that Tesla’s vehicles would be worth more than consumers paid for them because they would morph into a fleet of robotaxis in the near future. While everything that has happened since then continues to show that Tesla’s 2016 Autonomy Day presentation was not on the level, Musk continues to push his favorite fantasy.

“We expect our vehicles over time will be able to generate significant profit through autonomy. So we do believe we’re laying the groundwork here and that it is better to ship a large number of cars at a lower margin and subsequently harvest a higher margin in the future, as we perfect autonomy,” Musk said. “This is an extremely important point.”

Tesla stock, down 3% to 4% in after-hours trading heading into the call, fell to declines topping 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 autonomy will be here in a matter of months.

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“There will be a little bit of two steps forward, one step back between releases, for those trying the beta” he said. “But the trend is very clearly toward Full Self-Driving, toward full autonomy. And I hesitate to say this, but I think we’ll do it this year.”

That is not what investors wanted to hear, as question after question focused on margins. With a double whammy of increased competition with new electric vehicles from the big auto makers, combined with the soft economy and rising interest rates, Tesla dropped prices on various models and in different markets about five times so far this year alone. That led to a drop in GAAP gross margins to 19.3%, down from 29% in the year-ago quarter.

Most of the questions on the company’s call were about profit margins or prices, with one investor trying to get a sense of what investors could expect for gross profit margins in 2023, excluding tax credits. The answers from Musk and other executives — beyond the fanciful autonomy response — were murky.

Full earnings coverage: Tesla stock falls 6% as price cuts hit profit margins

“This is a difficult environment to make projections like this,” Tesla Chief Financial Officer Zachary Kirkhorn said in a long-winded answer that did not include much, if anything, specific. “There’s a lot of macro uncertainty. There’s also headwinds and tailwinds. And this is basically a question, I think, that’s asking about our viewpoint on where costs will go.”

Tesla investors have been down this road before with Musk and his predictions about self-driving, so they should know to discard his prediction by now. But if Musk’s pipe dream is truly the only concrete answer Tesla has for restoring a margin profile that is the core reason for a valuation that’s out of whack with the automotive sector, Tesla stock could have a lot farther to fall.