Tesla's Q1 earnings miss: what investors should look out for

Tesla reported Q1 earnings last night and while most numbers fell short of analyst expectations, Musk’s showmanship managed to sway markets into buying the narrative of a brighter future for Tesla driven by its “revolutionary” cybercab and plans to produce cheaper models already in 2025. This sent the share up 13% in extended trading despite the disappointing financials. We believe investors should remain cautious on Tesla shares and await a stabilisation of the gross margin as Tesla’s valuation is difficult to defend if it turns out there’s no meaningful moat in the electric vehicle industry. Below we share our take on the status on Tesla and the highlights of the report.

The status of Tesla:

• Tesla's net financial remains strong.
  
  
• Musk delivered the exact showmanship that was needed to flip the narrative from the company’s worst quarter in more than a decade into investors believing in the future. He was successful in convincing investors that growth is coming, sending the company’s shares up 13% in extended trading.
  
  
• Musk tries desperately to maintain Tesla’s status as a technology company with the introduction of the “cybercab”. But the reality is that self-driving cars are almost impossible to deliver with current technology, and his previous forecasts about this have been horribly wrong.

• Tesla is under immense pressure from falling demand and intense price competition in the electric vehicle industry. That will not change any time soon, and Tesla is in for some rough quarters.
  
  
• Tesla’s latest price reduction, which came as late as last week, will continue to eat into revenue and margins in Q2.

• The 10% layoff announcement earlier in April is a sign of crisis, especially if it is to be believed that Musk argued for slashing 20% instead.
  
  
• Tesla’s results and stock performance in 2024 underscore that we cannot talk about the Magnificent 7 any longer, but rather the 6-Pack (Nvidia, Microsoft, Alphabet, Meta, Apple, and Amazon).
  
  
• The biggest outstanding question is whether there is any meaningful moat in EVs. Maybe James Dyson was right in 2019 when he ditched the EV market saying “they’re simply too easy to make”. If there is no moat, then Tesla’s valuation will be difficult to defend.

Earnings report highlights:

• Revenue: USD 21.3bn vs estimated USD 22.3bn.
  • Big miss - down 8.7% year on year, which is the biggest decline since Q3 2012.
    
    
• Operating income: USD 1.17bn vs USD 1.53bn.
  • Big miss
    
    
• Free cash flow: negative USD 2.5bn
  • Estimated to be positive in Q2 as inventory buildup starts to reverse
    
    
• Gross margin: declined to 17.4% from 29.1% at peak in Q1 2022
  • Underscores immense price pressure in the electric vehicle industry.

Other relevant highlights:

• Musk said Tesla is accelerating its plans to manufacture “more affordable models” as soon as early 2025.
  
  
• Tesla’s long-promised robotaxi is now officially being called “cybercab” and will be unveiled on 8 August and will come with a “revolutionary” manufacturing design according to Tesla.

Tesla weekly share price