Tesla margin likely declined in second quarter; focus on robotaxis, AI projects

Tesla (TSLA.O) is likely to report Tuesday that its second-quarter margin fell to its lowest level in more than five years, with CEO Elon Musk expected to redouble efforts on the company's robotaxis and AI product plans.

Discounts to clear inventory, price cuts and incentives such as cheaper financing options to boost electric vehicle sales have squeezed Tesla's margin over the past two years, while sales fell due to customer disinterest in its older model lineup.

The company is laying off 10% of its global workforce, a memo revealed in April.

Now, investors will want to hear more about Tesla's pivot to autonomous driving technology and how this could again differentiate the company from other automakers and propel a rally in its stock similar to the one that took it to a record high in 2021.

Musk had announced earlier this year that Tesla would unveil its robotaxi on Aug. 8, but last week noted that the automaker would need more time to incorporate a design change following a media report that the launch would be delayed until October.

Wall Street expects Tesla's automotive gross margin, excluding regulatory credits, to have fallen to 16.27% in the April-June period, its lowest level since the first quarter of 2019, according to 20 analysts surveyed by Visible Alpha.

The profit margin on vehicle sales, excluding the sale of regulatory credits, was 16.36% in the January to March period and 18.14% in the second quarter of 2023.

Tesla's discounted financing at a time when interest rates are high "represents an even less visible price cut," Bernstein analyst Toni Sacconaghi said in a note earlier this month.

This cost will be "realized gradually over the life of the loan, effectively spreading margin pressure into future periods," he added.

Margins are likely to bottom out later this year and begin to rise next year, analysts said, as costs associated with the increase in Cybertruck production decline.

"AI and robotaxis are a huge opportunity over the next two, three, five years. So if you're a long-term believer, you'll take the spreads like they're your medicine," said Paul Marino, chief income officer at GraniteShares, which offers funds linked to Tesla stock.

ROBOTAXIS

Some investors believe that Tesla has little competition in the U.S. robotaxi industry and that its fleet of millions of cars on the road that can be converted into robotaxis with a software upgrade gives it an advantage over other automakers and ridesharing platforms.

But, as was the case with electric vehicles, Tesla could face competition in China from BYD (002594.SZ), the country's largest electric vehicle manufacturer, and dozens of other companies that have launched driver-assistance systems designed to navigate their densely populated urban areas.

Tesla has revealed few details about its autonomous driving strategy.

"They might still be a little discreet about it if they're in negotiations with OEMs for licenses, but I think eventually FSD adoption rates and other numbers will be disclosed," said Jamie Meyers, senior analyst at Laffer Tengler Investments, a Tesla shareholder.

The company could be years away from launching a fully autonomous vehicle with regulatory approval, according to autonomous car and regulatory experts.

Autonomous driving companies, including General Motors' (GM.N) Cruise, have faced technical and regulatory hurdles, and robotaxis could bring new challenges for Musk, who recently endorsed Donald Trump for U.S. president.

"The biggest hurdle for FSD and robotaxis will be getting regulatory approvals. The Trump administration could help accelerate that," said Dennis Dick, an equity trader at Triple D Trading, who is long Tesla.

AFFORDABLE CARS, DELIVERY GROWTH

Tesla announced in April a strategic shift in vehicle development, opting to introduce "new models" in early 2025 using existing platforms and production lines, rather than previous plans for an entirely new model.

"Investors are looking for a really positive outlook going forward, with some near-term surprises that can be implemented quickly, and I think with the new lower-cost model, they'll want to see progress on that," said GraniteShares' Marino.

Tesla delivered more cars to customers than analysts expected in the three months through June, but deliveries were about 5% lower than a year earlier. Analysts mostly expect the company to have a small increase in deliveries this year compared to 2023.

To match its 2023 delivery record of 1.81 million vehicles, Tesla needs to deliver at least 977,815 vehicles in the second half of this year.

"I think deliveries will grow slightly in the full year 2024 and about 15% in calendar 2025. Most importantly, talk about a return to delivery growth in September," said Gene Munster, managing partner of Deepwater Asset Management.

Collaboration: Grupo Auge | Reuters (International).