Tesla's profit at its lowest in 5 years as EV maker faces massive drag from price cuts, incentives

Tesla has reported its lowest profit margin in over five years and failed to meet Wall Street’s earnings expectations for the second quarter. The EV maker’s decision to reduce prices to stimulate demand, coupled with increased spending on artificial intelligence (AI) projects, has significantly impacted its financial performance.

Despite these challenges, Tesla remains on track to produce new, more affordable vehicles by the first half of 2025. However, these models are expected to achieve less cost reduction than initially anticipated. Following the announcement, Tesla’s shares dropped by 8 per cent in after-hours trading.

Surviving the storm
The second quarter proved tumultuous for Tesla. CEO Elon Musk chose to pause the development of an all-new cheaper car, instead focusing on less ambitious lower-cost models and the creation of self-driving taxis.

These efforts have helped boost the company’s shares, although the need for concrete results is increasingly critical for investors. Tesla also apparently put its expansion plans on hold. Most notably, it paused exploring potential sites and other related discussions for setting up a Tesla gigafactory in India.

In a bid to cut costs, Tesla also laid off more than 10 per cent of its workforce. The company’s profit margins were further impacted by restructuring charges and rising operating expenses, largely driven by AI projects. Tesla’s automotive gross margin, excluding regulatory credits, fell to 14.6 per cent in the second quarter, below the 16.29 per cent expected by analysts polled by Visible Alpha, as per a report by Reuters.

In the last couple of months, Musk has acknowledged the competitive pressure from new entrants offering substantial discounts on their EVs, making it more challenging for Tesla. The company’s EV deliveries have declined for two consecutive quarters due to rising competition and sluggish demand for affordable new models.

Sales of China-made EVs, which Tesla also exports to Europe and other regions, fell in the second quarter compared to the previous year. In contrast, Chinese automakers like BYD Co have shown strong sales growth.

A net positive outlook
Despite these hurdles, Tesla expects a sequential increase in production in the third quarter. The company reported a revenue of $25.50 billion for the quarter, slightly surpassing last year’s figures and analyst expectations. Notably, sales of regulatory credits tripled to a record $890 million, as traditional automakers buy credits from Tesla to meet clean-vehicle production regulatory targets.

Net income for the second quarter stood at $1.48 billion, down from $2.70 billion a year ago. Adjusted earnings per share were 52 cents, missing the Wall Street consensus of 62 cents.

Tesla’s Cybertruck production remains on track to achieve profitability by the end of the year. The company has started validating its first prototype Cybertruck vehicles using a breakthrough battery manufacturing technology called dry coating, which promises significant cost reductions once fully ramped up, with production potentially launching in the fourth quarter.

Focus on Robotaxis and AI Advancements
Tesla’s shares have surged over 30 per cent since June 13, driven by shareholder approval of Musk’s $56 billion pay package and optimism surrounding robotaxis.

Musk has consistently promoted Tesla as a technology company, emphasizing the importance of self-driving technology. Although predictions for this technology’s maturity have been repeatedly missed, Musk confidently forecasted that Tesla’s self-driving software would operate without human supervision by next year.

The deployment of Robotaxi hinges on certain advancements and regulatory approval. Musk has expressed confidence that regulatory hurdles would not be a major concern. He also anticipates regulatory approval for Tesla’s “supervised” Full Self-Driving software, which requires driver attention, in China and Europe by the end of the year.

Tesla has postponed the unveiling of its Robotaxi product from August 8 to October 10, claiming that they need to incorporate some important changes. Tesla also had to abandon developing its promised, cheaper car, which would have retailed for around $25,000, to focus on self-driving taxis.

Despite the ambitious visions, some investors remain cautious. Several fund managers and industry insiders have noted that while Musk is adept at generating investor interest, execution often falls short.