In case you missed it:

Detailed coverage of the 2024 We Robot event can be found in section 4 of this article.

Revenue tailwinds for the quarter included regulatory credits and its energy generation and storage business. Headwinds included $300M in foreign exchange impacts, lower average selling prices and lower deliveries – partially due to its Model Y production overhaul (more later).

Margin tailwinds for the quarter included regulatory credits, comping over the Cybertruck launch last year and lower input costs per vehicle. Cost efficiency gains continue an encouragingly consistent trend and came from lower raw material costs. Headwinds included lower fixed cost leverage from the Model Y refresh, AI and 22% Y/Y R&D growth. Lower average selling price, which was related to mix shift and more financing offers, also hurt profitability.

While the auto GPM ex-credit trend looks ugly, Tesla remains the most profitable electric vehicle (EV) program in the USA by a sizable margin. Whether it’s economies of scale, vertically integrated manufacturing or premium price points, it’s still the nicest house in a currently troubled neighborhood.

“We’ve been on the edge of death a dozen times. This is not one of those times.”

CEO Elon Musk

Tesla unsurprisingly pulled guidance calling for positive Y/Y automotive growth and roughly 50% Y/Y energy storage and generation growth for 2025. Both businesses are materially affected by tariffs. That makes forecasting cost structure and demand a guessing game that they’re wise to avoid playing. Tesla does make more cars in the U.S. than its typical peer and does feature a global, “localized” manufacturing footprint. Its Model Y has been voted the most American model by Car.com since 2022. They’ve been working on domestic manufacturing for many years. Still, while it is in better relative shape, it is not immune. They’re subject to Canadian and Mexican tariffs and they source lithium battery parts from China. It is working on replacing this need, but that will take time. Finally, it still sees a little more than $10 billion in 2025 CapEx.

As of right now, Tesla trades for 90x forward EPS. Between the profit miss and tonight’s comments from the president on China Tariffs probably “falling substantially” profit estimates will remain volatile. They’ll fall if the trade war intensifies. They’ll rise if it abates. Today’s headlines make abating more likely. As of right now, EPS is expected to grow by 4% this year and by 34% next year.

Affordable Model & the Model Y:

Last week, rumors swirled that Tesla was delaying the launch of its mass-market affordable model from the first half of 2025 to later in the year or even 2026. Based on leadership commentary, the delay is a lot more mild than publications made it sound. Good news for bulls. Production is still on schedule to begin before the end of June. That’s important for Tesla for a few reasons. First, poor macro makes cheaper models more appealing. A worsening backdrop paired with rising input costs stemming from tariffs is certainly not ideal, and this model can help Tesla weather some of the potential turbulence – at least on the demand side. Secondly, these vehicles borrow from existing manufacturing lines. These are not units made from its end-to-end, next-gen manufacturing process teased over the last year+. This allows Tesla to extract more value and demand from existing fixed costs and preserve cash while it gears up for that transition.

Tesla changed out production lines across all 4 major Model Y production hubs this quarter. It did so with “no major disruption,” although it did unavoidably lose a few weeks of production during the quarter. Leadership explicitly told us to expect this during the Q4 call. During the refreshes, the company also prepped capacity for the launch of new cars like its mass-market model poised for shipments this year and perhaps Cybercab too. There is plenty of available capacity to use at its Texas facility.

“The full utilization of our factories is the primary goal for these new products.”

 VP of of Vehicle Engineering Lars Moravy

Results & Market Share — The Model Y and Trade War Debate:

Considering the Model Y changes weren’t a surprise, they shouldn’t have been a source of the profit or demand misses vs. consensus estimates. It should have been at least mostly baked in.

That leaves us with geopolitical chaos, competitive dynamics and political involvement as the other potential sources of the relative underperformance vs. expectations. 

The trade war is, in my mind, the biggest culprit. Leadership called out ramping uncertainty as a material headwind, and I think that is an entirely valid excuse. Cars are big ticket purchases with useful lives that can be stretched during hectic times like these. It makes sense that demand is pausing. Additionally, it’s not like these numbers were amazing... yet positive tariff news during the earnings call was more of a stock mover than anything on the financial statements. That’s telling and it’s because people know how reliant Tesla’s 2025 results are on the path of trade policy. The President saying “tariffs on China will substantially fall” is great news for this company and so many others.

So trade war is probably the main factor for underwhelming results. At the same time, that would not lead to market share losses in isolation. All of its competitors are dealing with the same issues. And as you can see below from Tesla’s own data – as well as the news we covered last week on it losing 11 points of market share in California – trends don’t look great. The Model Y overhaul is contributing, but I don’t think that’s the sole source; trends were worsening long before that began. That leaves us with tougher product competition or Musk’s political involvement explaining the rest of the misses. Leadership did acknowledge that the vandalism at some facilities is a factor and I think that’s legitimate. Considering this, Musk telling the world his role with the current administration will greatly shrink starting next month could be positive for sentiment. Again, I think this is mainly due to the trade war, but politics could be contributing a bit too.

Robotaxi:

Robotaxi remains on track for a “pilot launch” in Austin this June. Initial launch vehicles will all be Model Y, with Cybercab scaled production planned for 2026. By the end of next year, Musk sees the Robotaxi business becoming material to Tesla overall. It’s worth noting that these autonomous rides will be remotely manned on occasion to begin, but the reiteration here is still encouraging.

These are the kinds of assurances that especially need to come when the core business is as challenged as it currently is. Market share continues to decline across every market, but the promise of this product (and Optimus) continue to understandably enamor shareholders. It’s these launches that need to happen and scale without drama to keep investors focused on the future potential instead of the present financials. No change to schedule here is good news.

Energy Business:

Energy is arguably more vulnerable to tariffs than its auto business. The supply chain (especially pre-ramping its own lithium refinery in the USA) is heavily reliant on China, which is another reason why today’s comments from the President are so positive for Tesla. Despite these tariff-related headwinds and continued business lumpiness, they expect trailing 12-month growth to continue. It sees tailwinds stemming from higher AI energy needs materially offsetting macro weakness to drive this persevering growth. Insatiable AI energy needs are forcing providers to make grids (which are famously inefficient) better at storing and wasting less energy. Tesla thinks Megapack is the best way to do this and the firm is enjoying a flood of demand from large utility companies.

Furthermore, Megapack (battery storage) and Powerwall (rechargeable home battery) both remain supply constrained, which should mean overall demand levels can take a bit of a hit while Tesla still finds great growth and sells everything it can make. That may happen at lower margin due to shifting supply/demand dynamics, but that impact should be modest considering Tesla entered this pocket of weakness from a point of strength.

“While the current tariff landscape will have a relatively larger impact on our energy business compared to automotive, we are taking actions to stabilize the business in the medium to long term and focus on maintaining its health.”

Shareholder letter

LIDAR vs. Vision-Only Autonomy:

There’s an interesting debate on the approach Waymo and most others are taking (Lidar) vs. what Tesla is doing (vision only). Tesla argues that Lidar will only work for geofenced urban areas. Musk has no interest in building what he views as an inferior technology vs. “vision only architecture with end-to-end neural networks trained on billions of examples of real-world data.” He thinks this will be scalable and safe for deployment across geographies and use cases. Furthermore, they believe the general autonomy approach will allow Tesla to expand operations more quickly, rather than going city by city. Finally, they think Tesla will be able to produce these cars more affordably than anyone else, due in part to the lack of expensive sensors that Lidar requires. 

On the other hand, Waymo is poised to deliver 50% cost reductions with the next hardware version and costs will keep plummeting thereafter. Waymo would say Lidar is why they already have growing businesses in several cities. They’re already building a first-mover advantage and there are multiple more competitors joining the market this year. And while its use cases are all geofenced, the included demand encompasses the majority of ride-sharing demand overall. They don’t need to service fringe suburban areas to create a scaled business. Yes… Waymo’s approach is limited… it’s just limited to dense cities where the money is made. Finally, vision-only does continue to struggle with fog and sun glare. Leadership downplayed that on the call, but this is common sentiment among Tesla owners. Vision-only needs to work in all conditions. I tend to think Waymo is taking the less risky approach while Tesla’s floor is lower and ceiling arguably higher. I prefer Waymo’s strategy and appreciate the already-established business, but that’s stylistic taste from me more than anything.

Batteries:

Other News:

The auto numbers were pretty bad aside from auto GPM ex-credits, which is a highly important metric for Tesla. The energy business is overcoming real headwinds and thriving. That provides a needed offset for auto weakness. Beyond that, reiterating timelines for all future product deployment is a notable positive. Again, if the core business is struggling… it’s even more important for future prospects to be developing as expected. According to the team, that is the case.

It cannot be overstated how important the path of trade policy is for Tesla’s 2025 results. That is arguably as important as any internal initiative they have today.

I’m not willing to own a mega-cap that is reliant on more favorable trade outcomes or value creation coming from potential product launches. Bulls need to be adamant that growth will vastly accelerate, margins will bottom and market share will rise if trade resolutions come. That’s reasonably likely in my mind. But at roughly 100x forward EPS, bulls probably also have to be highly confident that Optimus and Robotaxi will grow as expected. Tesla will need to keep convincing shareholders that the future is theirs. If Optimus and Robotaxi time-to-market optimism is well-placed, the runway is loaded with promising opportunity at Tesla. That will mean it deserves a hefty valuation despite poor present results… but that’s a sizable if. While I deeply admire Tesla for the great American growth story it is, this one isn’t for me.