Tesla's stock took a significant hit on Wednesday, dropping over 8% in pre-market trading after the company reported second-quarter earnings that fell short of Wall Street expectations. The electric vehicle (EV) giant saw its net income plummet by 45% year-over-year, from $2.7 billion to $1.5 billion, despite a 2% increase in revenue, which reached $25.5 billion, surpassing the anticipated $24.5 billion. This paradox of rising revenue but falling profits has raised questions about Tesla's current market strategy and future prospects.
The decline in profits was primarily attributed to a decrease in automotive revenue, which fell by 7% compared to the previous year. Tesla delivered 443,956 units in the quarter, a near 5% decrease from 2023. The company has been grappling with slowing growth in EV sales and intensifying competition from other manufacturers, which has led to the implementation of various sales incentives, including reduced interest rates and price cuts. These measures, while boosting sales volumes, have significantly compressed profit margins.
"There have been quite a few competing electric vehicles that have entered the market and mostly, they have not done well, but they have discounted their EVs quite substantially, which has made it a bit more difficult for Tesla," CEO Elon Musk acknowledged during a call with analysts. Musk remains optimistic, viewing the current margin squeeze as a "fairly short-term" issue.
The company's automotive gross margins, excluding regulatory credits, fell to 14.6% for the second quarter, missing analysts' expectations of 16.29%. This five-year low in profit margins underscores the urgency for Tesla to bring lower-cost models to market. Goldman Sachs analysts noted, "Until Tesla is able to begin production of new lower-cost models, which the company expects in H1 2025, we believe pricing/incentives could remain a key demand lever and weigh on margins."
Despite the profit woes, some analysts maintain a bullish outlook on Tesla's long-term prospects, particularly in the realm of autonomous vehicles and artificial intelligence. "The next phase of the Tesla growth story is around autonomous, Robotaxis, and AI playing out for Musk & Co. in our view, and that vision is on the doorstep," said Dan Ives, an analyst at Wedbush Securities.
Musk announced that Tesla's highly anticipated robotaxi unveiling event has been rescheduled to October 10. These self-driving vehicles are expected to be a cornerstone of Tesla's future ride-hailing service, generating considerable excitement among investors. Musk assured that the first robotaxi ride would occur "for sure next year."
Furthermore, Musk reiterated his belief in the potential of humanoid robots, such as Tesla's Optimus, which he projected would see internal usage increase from 1,000 units to "several thousand" by the end of 2025. He also hinted at the completion of "most of the engineering" for the next-generation Roadster sports car, expected to boast a 0-60 mph time of under one second and a $200,000 price tag.
However, some analysts express skepticism regarding Tesla's ambitious timelines for its autonomous and AI-driven products. "We do worry about the company's ability to secure regulatory approvals and don't see a 2025 timeline as realistic for a service offering," remarked Tom Narayan of RBC.
Tesla's share price has experienced volatility, partly due to Musk's leadership style and strategic decisions. Although only one of the 50 analysts covering the stock has downgraded their rating post-earnings, the consensus remains a "hold," with a median price target of $212.50, suggesting a potential 13% decline in the stock over the coming months.
