Tesla's Elon Musk Is Willing To Bet Tesla's Profits On Driverless Cars

Elon Musk is years behind the track in his goal of making Tesla Inc.'s cars fully autonomous. He's now stated unequivocally that he's ready to stake the company's profit margins on making it happen.

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During a conference call last week, Musk stated that Tesla had the ability to sell cars at "zero profit" and then earn enormous sums afterward from driverless software.

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What's the catch for investors? His forecasts that self-driving Teslas will be available by 2019 have not come true.

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"We're the only ones making cars that we could technically sell for zero profit right now, and then yield actually tremendous economics in the future through autonomy," Musk stated on 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."

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The difficulty Musk has encountered in making his autonomous ideas a reality hasn't stopped him from proceeding with price cuts that threaten to spark a pricing war. 

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In just a few months, the Austin, Texas-based startup has reduced the price of its best-selling Model Y by 29%. This has harmed the company's margins and alarmed investors concerned about declining profitability. 

Self-Driving Dreams

For years, the goal of a genuinely self-driving vehicle has energized the auto industry, and Tesla's CEO has been one of its most vocal supporters. However, the firm has failed to deliver on its claims of dominating the roads with robotaxis.

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Tesla provides a Full Self-Driving system, which, despite its name, just supports human drivers who are entirely responsible for driving the car and must have their hands on the wheel and eyes on the road.

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Customers pay $15,000 for the optional system, with some of the income deferred because it is not a finished product. It won't be until the feature lives up to its hype, which Musk claims will come this year.

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According to Jeffrey Osborne, a Cowen & Co. analyst, Elon Musk "dipped into the well and recycled prior comments about FSD being complete by year-end, demand outstripping supply and vehicles being an appreciating asset over time as full self-driving becomes a reality," in a note summarizing the Tesla CEO's remarks. We challenge each of these presumptions. 

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The fourth quarter of last year saw Tesla realize $324 million, by far the highest ever, of its deferred revenue, which the company has started to recognize. The company has been realizing less deferred revenue than anticipated in regulatory filings, despite that higher-than-average haul. Its forecast for 2023 is the lowest in almost four years, coming in at $639 million.

Tesla did not disclose how much deferred revenue it recognized in the first quarter in its earnings statement or investor call last week. The amount should appear in the company's 10-Q filing, which is scheduled in the coming days.

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Software Sales

Morningstar Research analyst Seth Goldstein viewed Musk's zero-profit statement as "more theoretical," but said the wider strategic aim of earning money by selling software services to current clients makes sense.

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

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Although Tesla's cash flow fell to a two-year low in the first quarter, Chief Financial Officer Zachary Kirkhorn indicated that the company 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."

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As they scale up production of their own battery-powered vehicles, other automakers are intently following the EV market leader's movements. It's unclear how far Tesla is ready to go to reduce prices — and margins.

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