Tesla Inc. reported abysmal numbers for the first quarter on Tuesday evening. Naturally, Chief Executive Officer Elon Musk kicked off the call with a discussion on why he must fix America’s finances, facing down an army of alleged moochers.
For any other company’s stock, the combination of these results with Musk’s political priorities would spell doom. The closely watched metric of Tesla’s automotive gross margin, after stripping out sales of regulatory credits, slumped to 12.5%; the lowest, according to Morgan Stanley, in over a decade, when Tesla was still more of a startup. Adjusted earnings came in almost 40% below a consensus forecast that had been nosediving anyway. Tesla eked out positive free cash flow, but only through a combination of favorable moves in accounts payables and receivables, and by slashing capital expenditure almost in half.
To cap it all off, the electric-vehicle maker suspended guidance due to the recent “shifting global trade policy” that you may have heard about. There is a double irony here. First, Musk has had a fairly tight relationship with the US president doing much of that shifting. Second, Tesla’s guidance was hardly the brightest of beacons, somehow marrying volatility and vagueness in recent quarters (see this).
Hence, as of writing this, after-hours trading has Tesla’s stock … up almost 5%.
Given we already knew sales had slumped, and partly because of factory turnarounds to refresh the Model Y, one might argue the bad news was priced in already. That’s a stretch, though, when Tesla’s stock, despite sliding this year, still trades at 85 times forward earnings. Moreover, even idled production lines couldn’t account for the extent of the drop in sales this quarter (see this).
The bigger factor lifting spirits was that, having defended the Department of Government Efficiency’s role in saving the country, Musk then explained he would nonetheless be stepping back a bit from this important work next month. He added, though, that this would still involve spending one or two days a week on DOGE, which still seems like a lot. This is some odd messaging. When the CEO’s relationship with the White House is damaging the brand, it is not advisable to lead the call that should be explaining the company’s worst earnings in years with a MAGA-gram — and then add that you will step back but only a bit.
When it comes to Tesla’s EV sales, however, politics are more of a catalyst than an underlying cause. Musk’s embrace of US President Donald Trump has clearly hurt, particularly in Europe and the blue-state EV heartlands in the US. Yet a glance at Tesla’s sales in California shows that, when it comes to growth, the rot set in quite a while before November’s elections.
The bigger problem is that Tesla’s ageing vehicle lineup has collided with increasing competition, something that Musk’s DOGE duties compounded but did not create. As much as investors might welcome an extra slice of Musk’s week, don’t forget that before he donned the red cap, he made the company focus on developing the highly priced, and highly angular, Cybertruck — its first new model in years and, thus far, a flop. Tesla sold just over 6,400 in the first quarter, according to Cox Automotive, a fraction of its production capacity of over 31,000. The company still touts a lower-cost EV due imminently, though it remains to be seen.
The result is not just a sustained decline in Tesla’s earnings but, importantly, also in the quality of those earnings. Ironically, the further right Musk moves, the further left Tesla’s earnings swing. Those regulatory credits for EVs that Tesla sells — which aren’t beloved by Republicans — accounted for 31% of the company’s pre-tax earnings last year. In the first quarter, they accounted for 101%. In fact, strip out those credits, along with interest earned on Tesla’s bank balance and “other” items like crypto marks, and underlying operations actually flipped to a loss.
Needless to say, rather than dwelling on these deteriorating results from the company’s biggest existing business, Musk focused on the future. The most important deliverable is launching some sort of robotaxi pilot in Austin in June. This single-city service represents an implicit climbdown from Musk’s earlier visions of robotaxis everywhere. The latter remains the ultimate goal, and Musk even went as far as to say that in the future, “most people are not going to buy cars.” (Given Tesla’s slumping sales, some folks have perhaps jumped the gun on this.)
More pertinently, Musk cautioned that, even with autonomous rides arriving in Austin soon, investors shouldn’t expect robotaxis to become “material” to the bottom line until the middle or second half of next year. So there’s your guidance. A typical Tesla invitation to keep racing toward an elusive destination and never mind what you saw in the rear-view mirror.
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