Tesla's AI Hype Hits Reality --- Musk leans into views of Tesla as AI leader, but doesn't signal real progress on self-driving tech

"Tesla's second-quarter sales push came at an even higher cost than expected, but who's counting?

The electric-vehicle maker reported operating profit of about $2.4 billion for the second quarter, 3% lower than in the same period last year and below the median analyst forecast of $2.6 billion compiled by the company.

Investors were prepared for weak profit, despite strong second-quarter sales, given Tesla's recent price cuts: At $40,240 in the U.S., the basic Model 3 model is now 14% cheaper than it was at the start of the year. The result ended up worse than expected mainly because of a step up in overhead, notably research-and-development spending. That pushed the operating-profit margin below 10% for the first time in more than two years.

Yet it isn't clear today's market cares much about today's profit, at least within reason. What investors seem to crave right now is growth. Tesla has offered that in spades this year by doubling down on its aggressive capacity expansion even in the face of weaker demand. But that may also be where the company let Tesla bulls down Wednesday.

On July 2, the company reported 83% growth in deliveries year over year for the quarter, injecting fresh energy into a breathless rally that has recently taken Tesla's market value back above $1 trillion. But on Wednesday's earnings call, Chief Executive Elon Musk failed to reiterate the hope he expressed three months ago that production this year might reach two million vehicles. The company instead stuck with its existing base case of 1.8 million, citing summer shutdowns for factory upgrades.

The stock, having barely moved in initial postmarket trading following the results' release, fell steadily through the call. It finished Thursday's trading down 9.7%.

Investors' focus on Tesla's growth is related to the broader stock-market hype around artificial intelligence, a crucial ingredient for self-driving cars. Musk reasoned on Tesla's April call that selling as many vehicles as possible was rational, potentially even at much lower margins, because it expanded the fleet to which the company could distribute high-margin vehicle-autonomy software via over-the-air updates.

In a market also fixated on Nvidia, whose chips power Tesla's efforts to automate driving, plenty of investors seem to have bought into this idea. The most popular question on the platform the company uses for crowdsourcing discussion points ahead of its earnings calls was: "Has any automaker approached Tesla to license FSD?" FSD stands for "full self driving," the software package for which Tesla charges $15,000 even though it is still in testing mode and doesn't allow drivers to take their eyes off the road.

Musk's response was that Tesla was in "early discussions" with a major automaker. In general, he leaned heavily into the AI hype on Wednesday's call, citing the reams of data the company collects from vehicles on the road and Dojo, the proprietary supercomputer it is building, as reasons why "Tesla is clearly at the cutting edge of AI."

Tesla didn't have news on FSD to report on Wednesday. Investors will have to wait for its 10-Q filing with the Securities and Exchange Commission to find out how much FSD revenue it booked. This is one accounting-based measure of progress: Upon sale, Tesla only recognizes part of its $15,000 fee in view of the product's partial functionality, leaving the rest to be triggered by performance milestones over time.

It wasn't, on the face of it, a strong quarter for the product. New installations were on pause for much of the period following a February recall issued at the request of the National Highway Traffic Safety Administration. After they resumed in May, German newspaper Handelsblatt reported thousands of FSD-related customer incidents such as braking problems, based on a data leak.

Musk said he thought the robo-driving package would be "better than human" by the end of the year, but he also recognized that he has said this many times before and that getting regulators on board will take longer. In general, he came across as less confident on the timeline than a quarter ago. "I know I'm the boy who cried FSD," he said.

This unusual bout of humility may also help explain the market reaction to Tesla's call. Behind the grandiose claims, the only measure of Tesla's AI progress was the dubious one of higher spending: Musk said Project Dojo alone would cost more than $1 billion over the next 12 months.

Even after its sharp drop Thursday, Tesla fetches about 80 times consensus earnings for this year. That is well ahead of the multiples commanded by Amazon.com, Nvidia and all the other trillion-dollar-plus tech companies -- not to mention rival carmakers, which typically trade on single-digit price/earnings ratios. True, Tesla is growing sales very quickly, but not earnings currently, given the vehicle-price cuts, and its scope to profit from AI remains wildly uncertain.

If that makes this year's rally sound overdone, Musk himself had some sage advice on Wednesday's call: "When the market is overly exuberant, you can sell."" [1]

1. Tesla's AI Hype Hits Reality --- Musk leans into views of Tesla as AI leader, but doesn't signal real progress on self-driving tech. Wilmot, Stephen. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 21 July 2023: B.12.