Tesla (NASDAQ: TSLA) didn’t have much good news to share with investors in its first-quarter earnings report this week.
As the company said in its summary, challenges such as the Red Sea conflict, an arson at the Berlin factory and the ramp-up of the updated Model 3 all added to costs and weighed on performance.
The company also noted industry-wide challenges in electric vehicles (EVs), as EV sales appear to have stabilized in the sector. Tesla already reported a 9% decline in first-quarter deliveries and first-quarter revenue also fell 9% to $21.3 billion, missing the $22.15 billion consensus. Automotive sales fell even sharper, falling 13% to $17.4 billion, due to price cuts in both the sector and Tesla.
These price cuts led to a sharp decline in operating margin from 11.4% to 5.5% and adjusted earnings per share fell from $0.85 to $0.45, below analyst estimates of $0.51.
Despite the weak results, Tesla shares rose after hours, gaining 13.3% in the additional session. CEO Elon Musk pulled a famous magic trick and focused investors’ attention on future products instead of current problems. His pitch was enough to revive the stock price.
‘We should be seen as an AI or robotics company’
Much of the earnings call focused on the company’s goal of achieving vehicle autonomy, or full self-driving, or FSD for short.
Musk essentially staked the company’s future on FSD, saying, “If someone doesn’t believe Tesla is going to solve autonomy, I don’t think he or she should be an investor in the company.” He also envisions a future where FSD enables Tesla owners to lease their cars, add value to them, drive demand and build an entirely new business for Tesla as it builds its own autonomous network for operates ride sharing services.
Musk’s comment above about the company deserving to be valued as an artificial intelligence (AI) company rather than a car manufacturer shows that he sees a future beyond just electric cars, and it is clear why he said that.
Even after Tesla shares tumbled this year, they are still trading at a significant premium to other conventional auto stocks General engines, Ford Motor CompanyAnd Toyota. Part of that premium is due to Tesla’s status as a pure EV maker, as electric cars are seen as the future of the industry. However, with EV sales growth stagnating and price competition squeezing margins, the EV growth story appears to have weakened significantly. Tesla acknowledged that car volume growth could be “significantly lower” than in 2023.
Given these challenges, more of Tesla stock’s premium may now come from Tesla’s potential in AI and full self-driving.
All eyes on FSD
In Musk’s view, Tesla is in pole position in the autonomous vehicle race because it has more than 5 million cars on the road. The company can virtually flip a switch to become fully self-driving once the technology is ready. Musk promised: “It’s only a matter of time before we surpass the reliability of humans in the not-too-distant future. And we are really moving towards an electric vehicle and an autonomous future.”
The opportunity in autonomous vehicles is likely enormous, but it is a mistake to assume that Tesla will have this market to itself. Alphabet‘s Waymo has racked up millions of miles in the cities where it offers autonomous ride-sharing, which now includes Phoenix, San Francisco and Los Angeles.
Other automakers like GM and Ford have their own self-driving technology, and there are also many tech companies involved in the AV race, like Amazon‘s Zoox and Intel‘s Mobileye.
Beyond Musk’s own suspicion, there is little evidence that Tesla is leading the FSD race. Last year, for example Consumer Reports ranked Ford’s BlueCruise AV technology above Tesla’s. In fact, the renowned product testing service GM said: Mercedes Benz, BMWToyota, and Volkswagen all topped Tesla in self-driving technology.
That doesn’t mean Tesla’s technology isn’t on the verge of a major breakthrough, but investors should take Musk’s words with a grain of salt.
Tesla’s CEO is fickle and prone to exaggerations. While he’s clearly a visionary leader and deserves more credit than anyone for bringing electric cars into the mainstream, he’s also been overpromised several times.
If FSD evolves the way Musk envisions, it would certainly be a game changer for the company, but investors should be aware that a significant premium is already priced into Tesla stock. As Musk himself said, right now, investing in Tesla stock seems more like a bet on Tesla’s full self-driving potential than anything else, and that could go either way.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions at Amazon. The Motley Fool holds positions in and recommends Alphabet, Amazon, Tesla and Volkswagen Ag. The Motley Fool recommends Bayerische Motoren Werke Aktiengesellschaft, General Motors, and Intel and recommends the following options: long January 2025 $25 calls on General Motors, long January 2025 $45 calls on Intel, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
For Tesla Stock Investors, There Are Only Three Letters That Matter was originally published by The Motley Fool
