Under the Spotlight Wall St: Tesla (TSLA)

Elon Musk talks a big game about autonomous driving, but Tesla ($TSLA) shareholders are happy the world’s richest man has his hands back on the wheel of the EV manufacturer. 

Well, sort of. The Tesla CEO promised his time spent running DOGE ‘will drop significantly’ and that ‘far more’ of his time would be spent at Tesla. Given the consumer backlash against his role in the Trump administration, the sharper focus on Tesla can’t come soon enough for investors who had watched the shares slide 40% since mid-December. But is he in it for the long haul? The Wall Street Journal reported this week that Tesla’s board opened a search to find his successor amid the fallout from his government work.

The stock has rallied 23% since Musk used the Q1 earnings call on 22 April to signal Tesla will receive more of his attention. But he’s warned getting back on course will involve ‘challenges’ and ‘unexpected speed bumps.’ Some of those challenges were on display in its Q1 earnings: lower deliveries, less revenue and more competition from rivals keen to exploit the brand damage from Musk’s role at DOGE.

Musk isn’t short of ambition and has offered a vision for Tesla’s true believers: creating the world’s most valuable company in the world by far. Already the world’s most valuable car company, he reckons the rollout of autonomous cars and autonomous humanoid robots could see Tesla be worth as much as the five next companies combined. Musk says this hinges on one thing: excellent execution. Investors would agree, but right now they’d just like to see Tesla sell more cars, given that’s the main source of revenue. 

Bumpy ride

There’s no sugarcoating the fact that Q1 was bad. Deliveries fell 13% year-on-year (YoY) to 336,681 units, the lowest level since Q2 2022. Production fell 16%. The challenge for investors is understanding how much of that drop reflects blowback from Musk’s role in the Trump administration versus other issues. The CEO acknowledged the negative impact of vandalism and ‘unwanted hostility’ towards the brand had an impact in some markets. 

However, the lower deliveries also reflected updates across all of its global factories, ahead of production of the refreshed Model Y. This led to several weeks of lost production. Tesla was producing legacy Model Ys until well into February, so there weren’t enough new Model Ys for potential customers to experience until the last few weeks of the quarter. Production of the new Model Y means Q2 sales data will be a catalyst for sentiment towards the stock. Investors will want to see if the updated SUV sparks renewed interest in the brand. 

The drop in deliveries comes amid aggressive competition from EV rivals keen to snare market share while Tesla’s brand wobbles. Chinese brands like BYD ($BYDDY) are giving Tesla a run for their money. After selling 416,400 cars in Q1, BYD is now the world’s leading EV seller. Apart from offering competitively priced cars, it recently introduced a battery that charges in minutes. Tesla has stuck to its timeline to deliver a more affordable vehicle in the first half of 2025, with speculation the company is working on a stripped down version of the Model Y SUV. 

Running costs

It’s no surprise that lower deliveries crunched Tesla’s top and bottom lines in Q1. Total revenue fell 9% YoY to US$19.33b as automotive revenue tumbled 20% YoY to US$13.96b. Net income plunged 71% YoY to US$409m. Quarterly earnings fell short of analyst expectations for revenue and earnings. 

Automotive margins continue to be squeezed. To be fair, some of that reflected a reduction in average selling prices to encourage sales of legacy Model Ys. The refreshed version of the SUV will have higher pricing. Nevertheless, automotive gross margin for the first quarter, excluding the sale of regulatory credits, fell to 12.5% from 13.6% in Q4. 

Tesla said it will ‘revisit’ its 2025 volume guidance in its Q2 update. That’s sensible given the impacts of Trump’s trade war on the automotive and energy supply chains, Tesla’s cost structure and consumer demand for durable goods. The company continues to invest in its vehicle and energy businesses, but the rate of growth depends on the success of its autonomy efforts (more on this shortly), production ramp at its factories and the economic environment. That’s a lot to get right for a stock trading at over 100x forward earnings.   

Electric dreams

Musk is betting big on autonomous driving and robotaxis to drive Tesla’s growth. On the earnings call, he promised ‘millions’ of Teslas would be operating autonomously in the second half of 2026. He’s sticking with plans to launch a robotaxi service in Austin, Texas in June, which will provide a platform to ultimately grow across the U.S. and globally. He told analysts that autonomy would ‘move the needle in a significant way’ from the middle of next year and then ‘go exponential from there.’ The U.S. government recently streamlined regulations for autonomous driving.

The CEO’s salesmanship has helped Tesla get to where it is. However, his optimism about autonomy has been heard before – without translating to reality. In 2015, he said self-driving cars would be available in three years. He was ‘very confident’ in 2019 that Tesla would have operational robotaxis by 2020. Even our 2021 coverage of Tesla noted how robotaxis were already an unchecked box in the company’s strategy. 

Tesla faces competition from large rivals like Alphabet-backed Waymo. Alphabet ($GOOGL) revealed on its Q1 earnings call that Waymo is serving over a quarter of million paid passenger trips each week. That's up 5x from a year ago. In Q1, Waymo opened service in Silicon Valley and expanded into Austin through a partnership with Uber ($UBER). It’s preparing to launch in Atlanta during summer and will come to Washington, D.C. and Miami in 2026. 

Musk argues Tesla has an advantage in using artificial intelligence and a special AI chip rather than ‘very expensive sensors’: that’s a dig at rival Waymo, which uses multiple sensors like LiDAR and radar. Tesla’s tech may prove superior in the future, but it’s Waymo that’s got cars on the road now.  

Tune up

Having Elon Musk back in the driver’s seat is the first step to getting Tesla off the hard shoulder and moving in the right direction. 

It’s hard to quantify the brand damage from the past few months, but the pressure is on Musk – and a possible successor – to revive sales. Besides new models and cheaper cars, they’ll have to finally deliver on the promise of autonomous driving – if Tesla’s share price is to return to the fast lane. 

This is not financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.