Elon Musk is willing to bet Tesla’s profits on a driverless dream

Elon Musk is years behind on his ambition to render Tesla Inc.’s cars fully autonomous. He’s now saying in no uncertain terms that he’s willing to bet the company’s profit margins on making it happen. Musk said on a conference call last week that Tesla has the wherewithal to sell cars at “zero profit" and then earn immense sums later off driverless software. The trouble with that for investors? His predictions since at least 2019 that autonomous Teslas are just around the corner haven’t panned out.

“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," Musk said April 19. “I’m not sure how many of you will appreciate the profundity of what I’ve just said, but it is extremely significant."

The challenge Musk has had turning driverless visions into reality isn’t stopping him from going forward with markdowns that threaten to set off a price war.

The Austin, Texas-based company has lowered the price of its top-selling Model Y by 29% across the last few months. They’ve dented the company’s margins and spooked investors who worry about profit margin deterioration.

Self-Driving Dreams

The dream of a truly self-driving car is one that has animated the auto industry for years and Tesla’s CEO has been one of its biggest proponents. But the company has yet to deliver on promises for a robotaxi-led future.

Tesla offers a system it calls Full Self-Driving that — contrary to its name — merely assists human drivers who are fully responsible for operating the vehicle and must keep their hands on the wheel and eyes on the road.

The company charges customers $15,000 for the optional system and defers some of that revenue because it’s not a finished product. It won’t be until the feature lives up to its name — something Musk claimed may happen this year.

“Elon Musk dipped into the well and recycled prior comments around FSD being complete by year-end, demand outstripping supply and vehicles being an appreciating asset over time as full self-driving becomes a reality," Jeffrey Osborne, a Cowen & Co. analyst, said in a note about the CEO’s April 19 comments. “We question all of these assumptions."

Tesla has begun to recognize some of that deferred revenue, including $324 million in the fourth quarter of last year — by far the most ever. But even with that bigger-than-usual haul, Tesla has been recognizing less deferred revenue than forecast in recent filings. At $639 million, its projection for 2023 is the lowest in almost four years.

Chief Financial Officer Zachary Kirkhorn didn’t say on a first-quarter earnings call how much deferred revenue Tesla recognized in the period, but acknowledged it had played a factor in the company’s smaller profit margin.

Software Sales

Seth Goldstein at Morningstar Research interprets Musk’s zero-profit vision as “more of a theoretical," but said in an interview the broader strategic goal of making money from selling software services to existing customers makes sense.

“Elon’s point is that the greater proportion of people you can get in a [Tesla], the more potential software purchasers there will be," Goldstein said. “And then over time that can become a very profitable and valuable business because it’s very high margin."

Kirkhorn indicated Tesla hasn’t abandoned the idea of making money on the cars it sells, telling analysts that reinvestment funded by cash generated from product sales is “very important for us." Though the company’s cash flow fell to a two-year low in the first quarter.

Other automakers are watching the EV market leader’s moves closely as they ramp up production of their own battery powered vehicles. How far Tesla is willing to go to slash prices — and margins — remains a wild card.