Tesla's Production Costs Continue to Fall: Time to Buy the Stock?

As was widely feared, recent price cuts for Tesla‘s (TSLA 4.19%) electric vehicles (EVs) took a toll on the company’s bottom line. The EV maker’s per-share earnings tumbled from $1.07 a year ago to $0.85 per share last quarter, while operating margins slipped from just over 19% to just above 11%. Critics of the lowered prices are vindicated.

There’s a method to the madness though, at least according to CEO Elon Musk. His conference call comment, “It’s better to shift a large number of cars at lower margin and harvest that margin in the future as we perfect autonomy,” points to the electric car manufacturer’s intended future. And the strategy makes a superficial amount of sense.

There are key questions that remain unanswered, however, making it tough to step into a Tesla position or stick with the stock if you already own it.

All part of a bigger plan?

Tesla is still making plenty of money on each vehicle it sells, for the record. It’s just making less than it could be, thanks to lowered vehicle prices.

The specifics: All told, last quarter’s average per-car sales price of just over $47,000 is measurably lower than the fourth quarter’s average per-car revenue of more than $52,000. End result? Although up year over year, Tesla’s total first-quarter automotive revenue fell nearly 8% from Q4 2022’s top line despite a respectable 4.3% improvement on the fourth quarter’s total deliveries of over 405,000 vehicles.

It’s not quite as disastrous as it sounds. The average cost of production per car fell from Q4’s figure, too, from nearly $39,000 to just above $37,000 for Q1. The slide extends a long — even if erratic — downtrend of Tesla’s typical cost to build a single car. Those costs should continue to come down as Tesla adds scale; the company still intends to be building 20 million cars per year come 2030.

Nevertheless, these new numbers are far from being compelling. Gross profits per EV had been holding relatively steady at around $15,000 per car until last quarter when they fell to less than $10,000. Per-vehicle earnings before interest, taxes, depreciation, and amortization (EBITDA) and net profit slumped as well. If this is the new norm, it’s not exactly a norm that thrills.

Tesla's recent price cuts are bigger than its recent per-vehicle production cost cuts.

Data source: Tesla. Chart by author.

As is so often the case, however, Elon Musk has a bigger-picture plan, even if he’s not offering a great number of details about it just yet. That plan is the monetization of Tesla’s autonomous driving tech. Musk explains in Wednesday’s call, “… we expect our vehicles over time will be able to generate significant profit through autonomy. So we do believe we’re … laying the groundwork here and that it’s better to ship a large number of cars at a lower margin and subsequently harvest that margin in the future as we perfect autonomy.” Tesla’s chief went on to point out during the earnings call, “… we’re the only ones making cars that technically we could sell for zero profit for now and then yield actually tremendous economics in the future through autonomy.”

Fair enough. While autonomous driving tech isn’t yet perfected, that day is coming sooner or later. And there’s no denying it’s got potential as a profit center in and of itself.

It’s just still not clear how.

It’s also not clear how the company’s current autonomous driving tech-development efforts will benefit from selling more-but-cheaper EVs to consumers now. And, when asked that very question during Wednesday’s call, Musk’s answer was more of a non-answer.

Tesla is switching gears, but…

Deutsche Bank analyst Emmanuel Rosner pressed the issue, asking Elon Musk on Wednesday, “Can you be a little bit more specific around ways you would be able to monetize sort of like this existing fleet in the future? … My understanding was that robotaxi would probably be for the next-generation vehicle — not the existing ones. So, I guess in which ways would you monetize it?”

Musk’s answer:

“Sorry. The robotaxi terminology can be a bit confusing because that’s sort of like a generic term for our next-generation vehicle. And we obviously are working on a next-generation vehicle. That’s going to be very compelling. This is just not the time to talk about it in details. … So, we internally call it robotaxi. But really, all of the vehicles that have Hardware 3 — which is the vast majority of our fleet — we believe will achieve full autonomy. … a Model 3 or Model Y would be a robotaxi, a robotic taxi. So … to the best of my knowledge, that we believe the current hardware can achieve full autonomy.”

What? It’s not only not much of an answer to Rosner’s question, it raises even more questions. Among these questions are when (or even if) a fleet of robotaxis might be put on roads en masse, why selling its electric vehicles at slimmer margins now helps the development of self-driving tech in the future, what might the robotaxi business model look like, and when will margins start improving?

And there’s the rub. Investors are being asked to have faith in the next chapter of Tesla’s existence without being given any meaningful details about it. They’re also being asked to deal with slimmer margins in the meantime and to do so without any hints as to how long these weaker profits may persist. That’s a tall order, to be sure.

Too many questions, and not enough answers to own Tesla stock

None of this means Tesla is doomed. Indeed, betting against Musk has historically been a bad bet. Not only is Tesla the market share leader for electric vehicles, but Musk can also be largely credited with bringing electric vehicles into the mainstream. Long-term investors have been well rewarded for their patience, too.

There’s also no denying the robotaxi industry — whatever it ends up looking like and wherever Tesla finds itself within it — is worth penetrating. Spherical Insights predicts the worldwide robotaxi market will grow at an annual pace of 80% through 2030 when it will be worth more than $100 billion per year. That outlook jibes with forecasts from Data Bridge Market Research, Mordor Intelligence, and others.

Sheer uncertainty firmly works against a stock’s value, though, and there’s plenty of it currently surrounding Tesla. Kudos to the company for being able to lower its per-car production costs. It’s just too bad that cost-cutting progress is being overshadowed by so many unknowns.

If you already own it, think (very) carefully about continuing to hold it. If you’re still only mulling a position in Tesla, though, you may want to consider other stocks until Musk can better articulate why its narrowed profit margins are necessary and until he can provide specifics about how its autonomous driving tech can be dependably monetized. He seems to be making an awfully big, expensive bet on this future, but this isn’t what most shareholders signed up for.