Tesla is in worse shape than you think

Things are undoubtedly bad at Tesla. Its sales are dwindling. Its profits are plunging, as is its share price. There are regular protests outside its showrooms. The Cybertruck is a flop. And somehow, it’s actually a lot worse than that.

The 71% drop in net income it just reported may have been overshadowed by CEO Elon Musk’s announcement that he would be stepping back from his controversial duties at the Department of Government Efficiency (DOGE). But that drop is just one indication of serious financial sickness at the EV maker, problems brought on by falling sales for the first time in its history and falling prices for electric vehicles.

The bottom line problem at Tesla is its vanishing bottom line. A deeper look at its first quarter report shows it’s now losing money on what should be its ostensible reason for existence – selling cars.

It was only able to post a $409 million profit in the quarter thanks to the sale of $595 million worth of regulatory credits to other automakers.

But if the Trump administration gets its way, the company can kiss those regulatory credits keeping it in the black goodbye, too.

It also faces possible rising costs due to the tariffs that the Trump administration is weighing on imported auto parts, which even Musk has said could be significant, albeit less so than at some competitor.

Sales are falling partly due to rising competition from other automakers’ EV offerings, especially in China. Tesla’s sales are falling in both Europe and China even as overall EV sales increase in those key markets. It’s about to lose its long-held title of the world’s largest seller of electric vehicles to Chinese automaker BYD.

But Tesla is also being hurt by Musk’s political activities, from leading the effort to drastically slash the federal government to supporting far-right parties around the world, like Germany’s AfD. Even some of its fans on Wall Street believe the brand damage could be lasting, despite Musk’s claim that he intends to step back from DOGE.

Musk: Tesla not on ‘ragged edge of death’

Musk dismisses the idea that the company is in any serious financial distress.

“We’ve gone through many a crisis over the years and actually been… on the ragged edge of death – at least, maybe a dozen times,” he told investors on the conference call Tuesday. “This is not one of those times. We’re not on the ragged edge of death, not even close. There are some challenges and I expect that this year will be probably be some unexpected bumps this year but I remain extremely optimistic about the future of the company.”

But what was not discussed on the call was the fact that the Trump administration wants to get rid of the federal emission rules that favor automakers that sell EVs.

It also wants to end the right of California and eight other states to demand tougher emissions regulations than the federal standards that would ban the sale of gasoline-powered vehicles by 2035. Without tough emissions rules at the federal and state level, there would be no regulatory credit sales.

The sale of those federal and state credits has been quite lucrative for Tesla, bringing in $8.4 billion in revenue since the start of 2021 alone, money that basically went straight to its bottom line.

For much of its history Tesla depended on the sales of those credits because it was losing money on its cars and solar energy products. But since the second quarter of 2021, it had been profitable every quarter even without the credit sales – until the most recent quarter, that is.

Profit margins shrivel

A key product margin is also shrinking. In the first quarter, that measure, the gross automotive profit margin, excludes not only regulatory credit sales but many other expenses. The margin was 12.5% in the most recent quarter, down from a high of 30% in the first quarter of 2022.

The last time Tesla had a profit margin that low was in early 2012, according to research from Morgan Stanley, back when the company was just getting started and selling only 5,600 cars a year, or nearly what it sold every day, on average, last year.

The 30% profit margin in 2022 had made it the nation’s most profitable automaker, even though it still sold a fraction of the vehicles sold by General Motors, Ford or Stellantis.

Between the combination of healthy profits and Tesla’s sales growth of between 37% and 87% a year, the stock went straight to – as Musk is so fond of saying – the moon. That made it the most valuable automaker on the planet by far, and Musk the richest person.

But sales slammed into reverse last year, marking its first annual decline in its history. Part of that was driven by rising competition from EV offerings of other automakers, particularly in China, and partly by backlash from some buyers turned off by Musk’s increasingly conservative and controversial political stances.

Even some of those still bullish on Tesla stock believe there has been lasting brand damage, but they believe the company will benefit from the introduction of “robotaxis” that will provide driverless rides to people using a new ride-hailing service Tesla says is about to debut in Austin, Texas.

The Department of Transportation appeared to give Tesla’s self-driving efforts a lift on Thursday as it announced an “automated vehicle framework,” which includes “removing unnecessary regulatory barriers” and enabling commercial deployment of automated vehicles. Investors took that as another sign of the Trump administration taking steps to help Tesla as its shares rose 10% on Friday. But the framework doesn’t ensure its long-promised self-driving efforts will be successful.

The promise – and problems – of robotaxis

Musk claims that service, and the introduction of humanoid robots that he says will be at work in Tesla plants later this year, will make Tesla worth more than the world’s next five most valuable companies combined.

Fans of the stock still believe in the future that Musk predicts, even if some are not as optimistic about the timeline.

Gene Munster, managing partner at Deepwater Asset Management, attributes the thinner profit margins partly to reduced sales and partly to a $250 million increase in research and development.

“It is an ugly year, but they’re kind of doing a set up for what should be improvements next year,” he said. He agrees with Musk’s vision that Tesla is well-positioned to profit from capturing much of the ride-hailing market.

But GM recently dropped its own robotaxi offering after concluding “the considerable time and resources that would be needed to scale the business, along with an increasingly competitive robotaxi market” didn’t support a business case. Ford also pulled back greatly from its own autonomous vehicle development efforts after concluding it wouldn’t be profitable anytime soon.

“Profitable, fully autonomous vehicles at scale are a long way off,” said Ford CEO Jim Farley.

And Musk has been promising Tesla’s robotaxis were about a year away for at least six years now, and even he admits the company has not lived up to previous predictions about the company’s timeline for its “full self driving” or FSD, capabilities.

“I’m the boy who cried FSD,” he said in a call with investors in July 2023. And even when rolling out his latest plans for robotaxis in October, he admitted “I tend to be a little optimistic with time frames.”