Tesla's Profit Margins Hit Five-Year Low Amid Price Cuts and Increased AI Spending

In the second quarter, Tesla missed Wall Street earnings targets, reporting its lowest profit margin in over five years due to price cuts and increased spending on AI projects. After-hours trading saw an 8% decline in shares.

Tesla Reports Lowest Profit Margin in Five Years as AI Investments and Price Cuts Impact Earnings

In the second quarter, Tesla missed Wall Street earnings targets and disclosed its lowest profit margin in over five years on July 23. The electric vehicle manufacturer reduced prices to stimulate demand and increased spending on AI projects.

According to Reuters, the company was scheduled to manufacture new vehicles, including more affordable models, in the first half of 2025. However, the models will not achieve the anticipated cost reduction. After-hours trading resulted in an 8% decline in shares.

"Perhaps more than ever in the company's recent history, Tesla's investors need results; those will have to come fast - both for the humanoid robot and for the Robotaxi," said Thomas Monteiro, senior analyst at Investing.com.

The second quarter was characterized by turbulence. CEO Elon Musk opted to forgo developing a new, more affordable car in favor of less ambitious models. It focused on developing self-driving taxis, contributing to the company's share price increase.

Tesla's profit was also impacted by restructuring charges and increased operating expenses, primarily driven by artificial intelligence initiatives. Additionally, the company terminated over 10% of its workforce to reduce costs.

According to 20 analysts surveyed by Visible Alpha, Tesla's automotive gross margin, excluding regulatory credits, was 14.6% in the second quarter, which was lower than the estimated value of 16.29%.

According to Dan Coatsworth, an investment analyst at AJ Bell, Tesla has failed to meet earnings targets for four consecutive quarters. “There is a lot of talk about robotaxis, humanoid robots, and autonomous driving, which provides an exciting narrative for investors but doesn’t get over the fact that these are tomorrow’s potential riches, not today’s."

Musk informed analysts during a conference call that Tesla has encountered some challenges due to the substantial discounts that new competitors have implemented on their electric vehicles.

Due to a scarcity of affordable new models and increasing competition, automakers have experienced a decline in the number of electric vehicle deliveries in the past two quarters. Tesla's sales of electric vehicles manufactured in China and exported to Europe and other regions declined in the second quarter compared to the previous year. Conversely, BYD and other Chinese manufacturers experienced robust sales growth.

Tesla announced on July 23 that it anticipated a sequential increase in production during the third quarter.

According to LSEG data, the company's revenue for the quarter was $25.50 billion, which was marginally higher than the previous year and analyst expectations.

Tesla's regulatory credit sales nearly tripled to a record $890 million in the second quarter compared to the previous year. To satisfy regulatory requirements for producing clean vehicles, conventional manufacturers acquire credits from Tesla.

In the second quarter, net income was $1.48 billion, a decrease from $2.70 billion a year ago. LSEG determined that the adjusted earnings of 52 cents per share were below the Wall Street consensus of 62 cents.

Tesla Shares Surge 30% on Optimism for Robotaxis and Musk's $56 Billion Compensation Package

Tesla's shares have surged by over 30% since June 13, when shareholders voted to approve Musk's $56 billion compensation package, which a Delaware court invalidated in January. Its shares were also bolstered by optimism regarding robotaxis.

Musk has advocated for Tesla as a technology company for years, and most recently, he has emphasized the importance of self-driving technology. On July 23, he predicted that self-driving software would be capable of operating Tesla vehicles autonomously next year, a prediction that has been overlooked for years. He expressed his surprise that this would not be the case.

Tesla said on July 23 that the "timing of Robotaxi deployment depends on technological advancement and regulatory approval." But Musk said during the conference call, "I don't think regulatory approval will be a limiting factor."

He also predicted that Tesla would receive regulatory approval for its "supervised" Full Self-Driving software, which necessitates driver attention, in China and Europe by the end of the year.

According to Musk, Tesla has postponed unveiling its Robotaxi product from August 8 to October 10 to implement significant modifications to the robotaxi.

After Reuters reported that Tesla had redirected its focus to self-driving taxis, he had announced the August 8 unveiling date. Tesla had previously abandoned plans to develop a new, affordable car that was anticipated to be priced at approximately $25,000.

"Elon is great at dangling the carrot in front of investors, but new ideas tend to be long on vision, but short on execution," said David Wagner, head of equity and portfolio manager at Tesla investor Aptus Capital Advisors.

Musk had stated 2022 that Tesla anticipated mass-producing a robotaxi without a steering column or pedal by 2024.

On July 23, General Motors (GM.N) announced that its Cruise self-driving unit will concentrate its development efforts on a next-generation Chevrolet Bolt. The company has suspended the development of its planned Origin vehicle, which was to lack a steering column, indefinitely.

Tesla said Cybertruck production "remains on track to achieve profitability by end of year."

Tesla has initiated the validation of its initial prototype Cybertruck vehicles, which utilize its innovative battery manufacturing technology, dry coating. This technology is expected to be "a significant cost reduction milestone once it is fully operational." Tesla anticipates that production will commence in the fourth quarter.