Austin: Elon Musk’s elusive goal of creating self-driving software is prompting Tesla’s CEO to prioritize sales over profits, a strategy that could deepen a price war — and investor worry.
Shares of the automaker fell 3.5% in premarket trading on Thursday after Musk indicated the cuts would not materialize, leaving gross margin already at a four-year low.
“Short-term differences in gross margin and profitability are actually minor relative to the long-term picture. Autonomy would make all these numbers look silly, Musk said.
Musk believes self-driving could one day become a large part of Tesla’s value and will provide a cushion to other automakers as they focus on making their EV operations profitable.
But their focus is on self-driving risks sacrificing current profitability for the technology, which is under fire from regulators after several accidents involving Tesla vehicles.
“The margin outlook could be disappointing for some, including the current company,” said Gene Munster, managing partner at Tesla investor Deepwater Asset Management, who had been expecting a gradual improvement in margins this year.
In the second quarter, excluding regulatory credits, automotive gross margin fell to 18.1% from 19% in the first quarter, according to Reuters calculations. This marked a steep decline from the 26% reported a year ago.
Analysts said the weakness in margins is likely to weigh on the stock, which has more than doubled this year on the back of the company’s growing adoption of its charging system.
Still, they were mostly positive about Tesla, with more than seven upgrading the stock while four downgraded it.
The stock trades at a 12-month forward price to earnings multiple ratio of 72.65, compared to Ford’s 8.45. (This story has been edited to correct the dateline)
(Reporting by Peter Henderson, Aditya Soni and Akash Sriram; Editing by Dhanya N Thoppil)