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BEVERLY HILLS, CALIFORNIA — At the Milken Institute Global Conference, Elon Musk, co-founder of Tesla and SpaceX and owner of X Holdings Corp., spoke about the current challenges Tesla is facing.
As Musk continues to make ambitious promises about Tesla’s future in autonomous driving and robotics, investors are seeing a steady decline in profit margins.
Tesla missed Wall Street estimates for second-quarter earnings, reporting a decline in its adjusted operating margin to 14.4%, the lowest in three years, down from 18.7% a year earlier. That marked the fourth consecutive quarter of decline.
The company reported net income of $1.48 billion on revenue of $25.5 billion, including $890 million in regulatory credits.
Tesla is getting hit on both sides. Spending is skyrocketing as the company invests in the artificial intelligence infrastructure needed to transform Tesla electric vehicles into self-driving cars and develop humanoid robots for factory work and other tasks.
At the same time, deliveries of Tesla’s most popular electric vehicles have fallen this year, prompting the company to cut prices and offer incentives such as low-interest loans.
“Affordability remains the top priority for customers,” Tesla Chief Accounting Officer Vaibhav Taneja said on the company’s earnings call. “In response, in Q2, we offered attractive financing options to offset sustained high interest rates.”
Tesla shares fell about 8% in extended trading Tuesday, settling at $227.23. They were down less than 1% for the year at the close, while the Nasdaq was up 20% in the same period.
Tesla said the decline in operating income was partly due to lower average selling prices and reduced shipments of its main electric vehicles. Automotive revenue fell 7% from a year earlier, marking the second consecutive decline, amid increased competition, particularly in China.
In April, Tesla began offering a five-year, zero-interest loan in China to boost electric vehicle sales. Originally set to end in July, the offer was extended again on Tuesday, according to a report by Shanghai-based electric vehicle news site CnEVPost.
The company launched similar deals in Germany, home to Tesla’s only European manufacturing plant. The deals included 0% financing for four years for buyers of the new Model Y Long Range All-Wheel Drive purchased during the quarter.
In May, Tesla offered financing in the U.S. at a 0.99% annual interest rate for the purchase of certain Model Y vehicles, with terms ranging from three to six years.
“We are offering extremely competitive financing rates in most parts of the world,” Taneja said. “This is the best time to buy a Tesla. If you are waiting on the sidelines, go out and get your car.”
Guggenheim’s Ronald Jewsikow, who recommends selling Tesla shares, issued a note ahead of Tuesday’s earnings report titled “Do Earnings Matter?” In it, he predicted that the company’s auto gross margin would miss estimates, “driven by a wide discount.”
“Doubling the Dojo”
As Tesla faces a much more competitive electric vehicle market than it has in the past, it is also looking to push into the future and catch up with companies like Alphabet’s Waymo in the robotaxi market. In addition to its massive investments in autonomy, there is the Optimus humanoid robot project, which Musk has said will eventually turn Tesla into a company worth tens of trillions of dollars.
These efforts require building data centers equipped with Nvidia graphics processing units (GPUs) and developing Tesla’s own AI processors. Tesla’s operating expenses increased 39% year over year in the second quarter to $2.97 billion. Capital expenditures for AI infrastructure in the quarter totaled $600 million.
Musk said on the call that the company will “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 a wing of its Austin, Texas, factory to house a data center as well.
“I think we have no choice because Nvidia’s demand is so high, and it’s obviously their duty to substantially raise the price of GPUs to whatever the market can afford, which is very high,” Musk said. “So I think we really have to make Dojo work, and we will.”
For investors worried about profit margins, all this might sound ominous. But Musk reiterated Tuesday that shareholders focused on short-term results are in the wrong company. He described the current problems as “noise.”
Musk said Tesla will hold a robotaxi reveal event on Oct. 10, two months later than originally planned. He said he would be “shocked” if Tesla didn’t offer self-driving rides by next year. In addition to the “dedicated robotaxi,” or CyberCab, Musk has been promising for years that Tesla will turn its customers’ current EVs into self-driving vehicles with software updates.
The updates will add features and improve the capabilities of its driver-assistance software, marketed today as Full Self-Driving Supervised. 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 to steer or brake at all times.
“I’ve said it before on these calls: Tesla’s value is overwhelmingly autonomy,” Musk said. “These other things are a nuisance compared to autonomy. So I advise anyone who doesn’t believe Tesla is going to solve the autonomy problem not to own Tesla stock.”
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