Elon Musk is years behind on his ambition to render Tesla Inc.s cars fully autonomous. Hes now saying in no uncertain terms that hes willing to bet the companys profit margins on making it happen.
Musk said on a conference call last week that Tesla has the wherewithal to sell cars at zero profit and then earn immense sums later off driverless software.
The trouble with that for investors? His predictions since at least 2019 that autonomous Teslas are just around the corner havent panned out.
Were the only ones making cars that technically we could sell for zero profit for now, and then yield actually tremendous economics in the future through autonomy, Musk said April 19. Im not sure how many of you will appreciate the profundity of what Ive just said, but it is extremely significant.
The challenge Musk has had turning driverless visions into reality isnt stopping him from going forward with markdowns that threaten to set off a price war.
The Austin, Texas-based company has lowered the cost of its top-selling Model Y by 29% in the span of just a few months. Thats dented the companys margins and spooked investors concerned about deteriorating profits.
Self-Driving Dreams
The dream of a truly self-driving car has animated the auto industry for years, and Teslas CEO has been one of its loudest proponents. But the company has yet to deliver on promises of robotaxis dominating the roads.
Tesla offers a system it calls Full Self-Driving that, contrary to its name, merely assists human drivers who are fully responsible for operating the vehicle, and must keep their hands on the wheel and eyes on the road.
The company charges customers $15,000 for the optional system and defers some of that revenue because its not a finished product. It wont be until the feature lives up to its billing something Musk claimed may happen this year.
Elon Musk dipped into the well and recycled prior comments around FSD being complete by year-end, demand outstripping supply and vehicles being an appreciating asset over time as full self-driving becomes a reality, Jeffrey Osborne, a Cowen & Co. analyst, said in a note recapping the Tesla CEOs comments. We question all of these assumptions.
Tesla has begun to recognize some of its deferred revenue, including $324 million in the fourth quarter of last year by far the most ever. But even with that bigger-than-usual haul, the carmaker has been recognizing less deferred revenue than its forecast in regulatory filings. At $639 million, its projection for 2023 is the lowest in almost four years.
Tesla didnt say in its earnings release or investor call last week how much deferred revenue it recognized in the first quarter. The figure should show up in its 10-Q filing due in the coming days.
Software Sales
Seth Goldstein at Morningstar Research interpreted Musks zero-profit comment as more of a theoretical, but said the broader strategic goal of making money from selling software services to existing customers makes sense.
Elons point is that the greater proportion of people you can get in a [Tesla], the more potential software purchasers there will be, Goldstein said in an interview. And then over time, that can become a very profitable and valuable business because its very high margin.
Chief Financial Officer Zachary Kirkhorn indicated Tesla hasnt abandoned the idea of making money on the cars it sells, telling analysts that reinvestment funded by cash generated from product sales is very important for us. Though the companys cash flow fell to a two-year low in the first quarter.
Other automakers are closely watching the EV market leaders moves as they ramp up production of their own battery-powered vehicles. How far Tesla is willing to go to slash prices and margins remains a wild card.
