Tesla’s profit margin is getting hammered by EV discounts and hefty AI spending

As


Tesla
CEO

Elon
Musk
continues
to
make
lofty
promises
about
his
company’s
future
in
autonomous
driving
and
robotics,
investors
keep
watching
profit
margins
deteriorate.

In
missing
Wall
Street
estimates
for

second-quarter
earnings
on
Tuesday,
Tesla
said
its
adjusted
operating
margin
shrank
to
the
lowest
in
three
years,
dropping
to
14.4%
from
18.7%
a
year
earlier.
It’s
the
fourth
straight
quarter
of
shrinkage.

The
company
reported
just
$1.48
billion
in
net
income
on
revenue
of
$25.5
billion,
which
included
$890
million
in
regulatory
credits.

Tesla
is
getting
hit
from
both
sides.
Expenses
are
soaring
as
the
company
spends
on
the
artificial
intelligence
infrastructure
Musk
says
is
needed
to
turn
Tesla
EVs
into
self-driving
cars,
and
to
develop
humanoid
robots
capable
of
doing
factory
work
and
more.

Meanwhile,

deliveries
of
Tesla’s
most
popular
electric
vehicles
have
been
dropping
this
year,
and
the
company
has
responded
by
slashing
prices
and
offering
other
incentives
like
low-interest
loans.

“Affordability
remains
top
of
mind
for
customers,”
said
Vaibhav
Taneja,
Tesla’s
chief
accounting
officer,
on
the
company’s
earnings
call.
“And
in
response,
in
Q2,
we
offered
attractive
financing
options
to
offset
sustained
high
interest
rates.”

Tesla
shares
tumbled
about
8%
in
extended
trading
on
Tuesday
to
$227.23.
They
were
down
less
than
1%
for
the
year
as
of
the
close,
while
the
Nasdaq
was
up
20%
over
that
stretch.

Tesla
said
in
its

investor
deck
that
the
decline
in
operating
income
was
due
in
part
to
the
reduced
average
selling
price
and
lower
deliveries
of
its
top
EVs.
Automotive
revenue
fell
7%
from
a
year
earlier,
the
second
straight
decline,
as
competition
ramped
up,
most
notably
in
China.

Tesla
began
offering
a
five-year,
zero
interest
loan
offer
to
spur
sales
of
its
EVs
in
China
in
April.
The
deal
was
supposed
to
last
through
the
end
of
July,
but
the
company
extended
the
offer
again
on
Tuesday,
according
to
a

report
from
CnEVPost,
a
Shanghai-based
EV
news
site.

The
company
rolled
out
similar
deals
in
Germany,
home
to
Tesla’s
only
European
car
factory.
The
offers
included
0%
financing
over
a
four-year
period
for
buyers
of
the
new
Model
Y
Long
Range
All-Wheel
Drive
purchased
during
the
quarter.

In
May,
Tesla
offered
a
0.99%
APR
financing
deal
in
the
U.S.
on
some
Model
Y
purchases,
with
terms
lasting
from
three
years
to
six
years.

“We’re
now
offering
extremely
competitive
financing
rates
in
most
parts
of
the
world,”
Taneja
said.
“This
is
the
best
time
to
buy
a
Tesla.
I
mean,
if
you’re
waiting
on
the
sidelines,
come
out
and
get
your
car.”

Guggenheim’s
Ronald
Jewsikow,
who
recommends
selling
Tesla
shares,
published
a
note
ahead
of
the
earnings
report
on
Tuesday,
titled
“Do
Earnings
Matter?”
In
it,
he
predicted
the
company’s
automotive
gross
margin
would
miss
estimates,
“driven
by
large
discounting
actions.”

While
Tesla
reckons
with
a
much
more
competitive
EV
market
than
in
the
past,
it’s
also
trying
to
push
into
the
future
and
catch
up
with
companies
like


Alphabet’s
Waymo
in
the
robotaxi
market.
In
addition
to
hefty
investments
in
autonomy,
there’s
the
Optimus
humanoid
robot
project,
which
Musk
has
said
will
eventually
turn
Tesla
into
a
company
worth

tens
of
trillions
of
dollars.

Those
efforts
require
the
construction
of

data
centers
filled
with
graphics
processing
units
(GPUs)
from


Nvidia
as
well
as
development
of
Tesla’s
own
homegrown
AI
processors.
Tesla’s
operating
expenses
soared
39%
from
a
year
earlier
in
the
second
quarter
to
$2.97
billion.
Capital
expenditures
on
AI
infrastructure
in
the
quarter
amounted
to
$600
million.

Musk
said
on
the
call
that
the
company
is
going
to
“double
down
on
Dojo,”
its
supercomputer,
“to
be
competitive
with
Nvidia.”

Musk
previously
promised
to
build
a
$500
million
Dojo
supercomputer
in
Buffalo,
New
York.
The
company
is
now
building
out
a
wing
of
its
factory
in
Austin,
Texas,
to
accommodate
a
data
center
as
well.

“I
think
we
kind
of
have
no
choice
because
the
demand
for
Nvidia
is
so
high,
and
it’s
obviously
their
obligation
essentially
to
raise
the
price
of
GPUs
to
whatever
the
market
will
bear,
which
is
very
high,”
Musk
said.
“So
I
think
we’ve
really
got
to
make
Dojo
work,
and
we
will.”

For
investors
concerned
about
profit
margins,
that
all
may
sound
ominous.
But
Musk
reiterated
on
Tuesday
that
shareholders
focused
on
short-term
results
are
in
the
wrong
company.
He
described
current
issues
as
“noise.”

Musk
said
Tesla
will
hold
a
robotaxi
unveiling
event
on
Oct.
10,
two
months
later
than
originally
planned.
He
said
he’d
be
“shocked”
if
Tesla
isn’t
offering
autonomous
rides
by
next
year.
Besides
the
“dedicated
robotaxi,”
or
CyberCab,
Musk
has
been
promising
for
years
that
Tesla
will
turn
its
customers’
existing
EVs
into
self-driving
vehicles
with
software
updates.

The
updates
would
add
features
and
improve
the
capabilities
of
its
driver
assistance
software,
marketed
as
Full
Self-Driving
Supervised
today.
Tesla
also
has
a
new
AI5
hardware
component
it
will
need
to
add
to
its
EVs
to
turn
them
into
self-driving
cars
that
don’t
require
a
human
ready
to
steer
or
brake
at
all
times.

“I’ve
said
this
before
in
these
calls
—
the
value
of
Tesla
overwhelmingly
is
autonomy,”
Musk
said.
“These
other
things
are
an
annoyance
relative
to
autonomy.
So
I
recommend
anyone
who
doesn’t
believe
that
Tesla
will
solve
vehicle
autonomy
should
not
hold
Tesla
stock.”

WATCH:

Tesla
has
a
lot
to
prove