“We are hard-pressed to think of any other precedent of a company of Tesla’s size basing its path of success on such binary bets,” writes Barclays, apropos the latest thing:
https://twitter.com/elonmusk/status/1780376546148327690
Sensibly, Barclays doesn’t define which binary bet.
This month we’ve had Reuters report that Tesla was cancelling its long-promised mass-market EV, known as Model 2, and using the same platform to make a robotaxi. (Shortly after tweeting that “Reuters is lying (again)”, Musk scheduled a robotaxi reveal for August 8.) A detailed follow-up from Electrek on Monday reported that Model 2 work had indeed been “completely defunded” and that the project was “effectively scratched right now as Tesla is putting all resources into its self-driving effort.”
We’ve also had 14,000 job cuts at Tesla and the departure of senior execs, with VPs Drew Baglino and Rohan Patel both exiting. We’ve also had Tesla cut the premium-tier driver assistance subscription price in half to $99 a month. We’ve also had reports that deliveries of Cybertruck, its last-but-one halo product, have been paused and that its accelerator has a tendency to jam .
Tesla has not officially commented on these or any other reports. Tesla has no press office. Emails go unanswered, including all the ones we’ve sent about when Tesla will hold an investor vote on moving its corporate registration to Texas , which Musk said on February 1 would be happening “immediately”.
But back to the current thing. Barclays analyst Dan Levy says that cancelling Model 2 in favour of a purpose-built robotaxi “would further drive a wedge between the ‘rational’ and ‘exuberant’ Tesla bulls.”
The “rational” bull case argument for Tesla is primarily based on the expectation that it will see an iPhone style consolidation of the auto market outside of China, with Tesla’s lead in EVs enabling dramatic share gains, especially as the legacy Western OEMs have struggled mightily on cost. Model 2 was set to be the big step forward in taking additional share. This group of investors generally views Robotaxi (i.e. fully autonomous vehicles running on the Tesla network) as a very long-dated opportunity.
The thing with Model 2, says Levy, was that it could realistically be delivered as early as next year. It was something tenable on the horizon, so was a reason to look past the current EV sales slump.
Without it, investors can only look forward to a collection of binary bets (AI and energy storage stuff as well as the robot chauffeurs and butlers). Throwing more resources at moonshots might be encouraging for those who see Tesla’s car manufacturing business as the stub of a Jetson’s-based investment case but everyone else is likely to be “increasingly uncomfortable in underwriting the story”, Levy says in an April 8 note.
Musk’s pivot to moonshots since then has been dramatic, so Tesla’s first-quarter results due April 23 are probably going to be awful. When faced with a 20 per cent quarter-on-quarter slump in deliveries there are not enough costs to cut, and while consensus forecasts have been grinding lower, they’re probably not low enough.
Barclays forecasts that Tesla will print its first negative free-cashflow quarter since Q1, 2020, as bloated inventories eat into working capital. It expects gross margin excluding regulatory credits could hit just 14.6 per cent, which would be a 2.6 percentage point deterioration from the previous quarter. That would put Tesla’s auto profitability back to where it was in 2017, shortly after the launch of the Model 3.
Will the margin guidance be any better? And even if it is, will it be believed? Tesla started the year with about 100,000 unsold vehicles and added another 45,000 and 50,000 in the first quarter. Though price cuts have so far done very little to stimulate demand, there’s no other strategy available to shift all that spare inventory.
Barclays also expects Tesla’s 2024 delivery volume to be flat. A year of stalled growth might make some predictions, like the below fleet size chart from a December-dated Morgan Stanley note, look a wee bit fanciful:
The surprise, given all that, is how little Tesla has derated . Things could be a lot worse. If Tesla weren’t the only pure-play publicly traded meme stock for a man with a $44bn loudhailer, they probably would be.
The usual pattern around Tesla results is for the stock to rally from an initial sell-off.
Barclays finds that in the week of earnings or a deliveries update, the stock is down 7 per cent on average. But in weeks without official news — when it’s just Musk’s tweets and the surrounding ecosystem of grift and nonsense — the stock is up 1 per cent on average.
That’s why all the robotaxi stuff is difficult to call.
Tesla’s business — well, the bit that sells cars rather than hype — has been visibly in trouble for more than a year. Investor who came in expecting a bump-free glide towards the global EV mass market should have sold already, while bargain hunters attracted by last year’s slump will probably have been stopped out by this year’s slump.
That leaves only the meme jockeys and futurologists. For them, going all-in on robotaxis may sound great for the 2030-something forecasts, and an earnings tape-bomb is just a speed bump.
Meanwhile, in the corner of a Tesla dealership near you, a mocked-up Optimus is surveying with unseeing eyes the deserted shop floor:
Further reading: — Putting a price on Tesla post Musk (FTAV) — Tesla’s Springfield Gorge trajectory (FTAV) — Tesla is nuts, will it ever crash? (FTAV, 2020)