Elon Musk is willing to sacrifice Tesla margins for market share

Elon Musk has indicated that he is willing to sacrifice Tesla’s profits in an aggressive push for market share in the short term, and then the company’s cars are fully autonomous so they can earn extra money through “robotaxis” with the goal of making more money.

The Tesla chief executive’s unorthodox justification for why shareholders should expect lower profits comes as the US electric carmaker announced price cuts this year, pushing its profit margins below already-reduced forecasts for the first quarter.

His comments on Wednesday’s earnings call sent Tesla shares down in after-market trading, adding another 6 percent to the 10 percent decline they’ve experienced since the start of the month on concerns about falling demand.

A series of price cuts since the start of the year pushed Tesla’s gross profit margin to 19.3 percent in the first quarter, less than the company had indicated when it began cutting prices and 10 percentage points short of a record one-year mark. Before.

“This is a good time to increase our lead and invest in growth as quickly as possible,” Musk said of the price cuts. He said Tesla has a “distinct strategic advantage” in making money from cars on the road once they become fully autonomous.

“We’re the only ones making cars that we can technically sell for zero profit now and make huge profits from autonomy in the future,” he said.

The company has repeatedly missed Musk’s goals for full autonomy and has only provided a detailed explanation of how Tesla owners can earn fees by renting out their personal cars as driverless taxis.

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So far Wall Street has taken a sanguine view of Tesla’s price cuts, hoping the group’s willingness to sacrifice some of its industry-leading power to maintain sales will increase its lead over other electric carmakers. Although its shares are still up 67 percent since the start of 2023, Musk’s apparent preference is to see margins fall further, with signs that price cuts have slightly boosted sales this year.

As Tesla focused on market share over profits, adjusted earnings per share fell 21 percent in the first quarter, even as revenue rose 24 percent from a year earlier. On most measures, such as its cash flow margins and operating profit margin, Tesla’s profit fell to its lowest level in two years, while its gross margin remained at levels seen three years ago.

Despite the sliding profit, Tesla still met Wall Street revenue expectations, with adjusted earnings of 85 cents a share on revenue of $23.3bn. On a regular accounting basis, earnings fell to 73 cents from 95 cents a year ago.

Tesla has announced price cuts of up to 20 percent on some versions of its best-selling vehicles, the Model 3 and Model Y. However, the number of vehicles delivered rose only 4 percent in the quarter from the final quarter of 2022.

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