Elon Musk is willing to bet Tesla’s profits on driverless dreams


Elon Musk’s ambition to make Tesla Inc.’s cars fully autonomous is years behind. He’s now unequivocally saying he’s willing to use the company’s profit margins to make it happen. Musk said on a conference call last week that Tesla has enough money to sell cars at “zero profit” and then make huge sums of money on self-driving software. What’s wrong with this for investors? He’s been predicting since at least 2019 that self-driving Teslas are coming, and the corner hasn’t panned yet.

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Updated on:
April 24, 2023 at 9:08 am

Tesla Chief Executive Elon Musk is waging an electric vehicle price war that is hurting the electric carmaker's bottom line. Musk said he was keen to sell more cars, not fret over immediate profits.  (Reuters)
Tesla Chief Executive Elon Musk is waging an electric vehicle price war that is hurting the electric carmaker’s bottom line. Musk said he was keen to sell more cars, not fret over immediate profits. (Reuters)

Musk said on April 19: “Technically, we are the only company that produces cars, we can sell them at zero profit now, and then generate huge economic benefits in the future through autonomous driving.” How many people will appreciate what I just said is profound, but it’s very important.”

Musk’s challenges in turning his driverless vision into reality haven’t stopped him from pressing ahead with price cuts that could spark a price war.

The Austin, Texas-based company cut the price of its best-selling Model Y by 29% over the past few months. They dent companies’ profit margins and spook investors worried about margin deterioration.

self-driving dream

The dream of a truly self-driving car has galvanized the auto industry for years, and Tesla’s CEO has been one of its biggest backers. But the company has yet to deliver on its promise of a robot-led future.

Tesla offers a system called “Full Self-Driving” — contrary to its name — that simply assists the human driver who is solely responsible for driving the vehicle and must keep his hands on the wheel and eyes on the road.

The company charges customers $15,000 for the optional system and defers some revenue because it’s not a finished product. Until the feature lives up to its name — which Musk claims could happen this year.

Cowen & Co. analyst Jeffrey Osborne said: “Elon Musk is in deep trouble and repeating previous comments on FSD, which will be completed by the end of the year, Demand exceeds supply, and as fully autonomous driving becomes a reality, cars will become an appreciating asset over time,” said the CEO in a note on April 19. “We questioned all of these assumptions.”

Tesla has begun to recognize some deferred revenue, including $324 million in the fourth quarter of last year – the most to date. But even with more revenue than usual, Tesla is acknowledging deferred revenue that is lower than forecast in its most recent filing. Its forecast for 2023 was $639 million, the lowest in almost four years.

Chief Financial Officer Zachary Kirkhorn did not disclose how much deferred revenue Tesla recognized during the period during the first-quarter earnings call, but acknowledged that it was a factor in the company’s lower margins.

software sales

Seth Goldstein of Morningstar Research explained Musk’s zero-profit vision as “more theoretical,” but said in an interview that the broader strategic goal of making money by selling software services to existing customers makes sense .

“Elon’s point is that you can get more people into a [Tesla], the more potential software buyers there will be,” Goldstein said. “And then over time, it becomes a very profitable and valuable business because it’s very profitable. “

Kirkhorn said Tesla hasn’t given up on the idea of ​​making money selling cars, telling analysts that reinvestment funded by cash generated from product sales is “very important to us.” fell to a two-year low in the first quarter.

Other automakers are closely watching the moves by market leaders in electric vehicles as they ramp up production of their own battery-powered vehicles. How far Tesla is willing to cut prices — and profits — remains an open question.

First published date: April 24, 2023 at 09:08 AM CST


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