🤖 Tesla: Autonomy Gamble
Demand rebounded but the focus is on Musk's bold vision
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Tesla just had its best day since 2013, with the stock surging 22% after the company reported its Q3 earnings.
While the numbers were strong, investors are focused on Elon Musk’s bold vision for autonomy—a vision that faces as many challenges as it does potential rewards.
A rebound in delivery, improved margins, and a surprising forecast of 20% to 30% sales growth next year jolted investor sentiment after a lukewarm reaction to the October 10 ‘We, Robot’ event.
The event featured products like the highly-anticipated Cybercab (robotaxi) and Optimus (humanoid robot). Despite the hype, the event was light on specifics, and Tesla’s stock dropped nearly 10% the next day.
Though Tesla has been around for over 20 years, the investment thesis remains more about what it could become tomorrow than what it is today. Musk aims to produce millions of autonomous cars and robots and become the largest company in the world. Valuation models based on trailing and near-term metrics don’t capture this.
Tesla can't be analyzed in isolation.
Just three days after the ‘We, Robot’ event, SpaceX launched its Starship spacecraft for the fifth time. The SpaceX “chopsticks” captured the Super Heavy booster shortly after liftoff, a critical step toward making the booster fully reusable. This milestone could revolutionize space travel by slashing turnaround times and radically altering cost structures.
Leading both Tesla and SpaceX, Elon Musk has a knack for turning radical ideas into reality. SpaceX's success in making rockets reusable has drastically cut space travel costs, proving that affordability can fuel wider adoption.
This approach echoes Tesla's autonomous ambitions: by developing self-driving vehicles like the Cybercab, Tesla aims to revolutionize transportation with similar cost-saving principles. As with any groundbreaking technology, it involves a gigantic range of outcomes.
A nuanced way to look at it is to look at Musk’s achievements while recognizing his timeline can be wildly optimistic.
Benedict Evans noted in 2021 that Elon Musk is “a bullshitter who delivers.” Whether Musk’s autonomy vision for Tesla will materialize is anyone’s guess, and fully autonomous fleets may still be many years away. However, Musk’s track record with SpaceX lends extra credibility to Tesla’s prospects, earning him the benefit of the doubt.
Will Musk’s ambitious vision for autonomy fully materialize?
Today at a glance:
Tesla Q3 FY24.
‘We, Robot’ Takeaways
Key quotes from the earnings call.
Waymo, Uber, and rideshare future.
1. Tesla Q3 FY24
Tesla's revenue comes from three primary sources:
🚗 Automotive: Revenue from selling electric vehicles, including models S, 3, X, Y, and the Cybertruck (80% of revenue).
🔌 Services and Other: Revenue from vehicle service, Supercharger network, and sales of automotive parts and accessories (11% of revenue).
🌞 Energy Generation and Storage: Revenue from solar products and energy storage solutions, like Solar Roof and Powerwall (9% of revenue).
Q3 FY24 Key metrics:
Production: 470K vehicles (+9% Y/Y and +14% Q/Q).
Deliveries: 463K vehicles (+6% Y/Y and +4% Q/Q).
Analysts expected roughly 464K deliveries, making it a slight miss. It was still short of the 484K record in Q4 2023. Tesla auto sales have plateaued despite price cuts in the past two years.
Income statement:
Revenue grew 8% Y/Y to $25.2 billion ($0.5 billion miss).
Gross margin was 20% (+2pp Q/Q, +2pp Y/Y).
Operating margin was 11% (+5pp Q/Q, +3pp Y/Y).
Adjusted EPS was $0.72 ($0.12 beat).
Gross margin trends:
Auto had a 17% gross margin, excluding regulatory credits. It was 15% in Q2 and 16% a year ago. The cost of goods per vehicle dropped to $35,100, its lowest ever. Cybertruck achieved a positive gross margin for the first time. The auto segment included $326 million of software revenue.
Services and Others had a 9% gross margin, positive for the 10th consecutive quarter and a record high.
Energy generation and storage remained the highest gross margin segment at 31%, also reaching a new high.
Tesla’s margins have historically been ahead of other car manufacturers thanks to three critical leverages:
🏭 Economies of scale (though gigafactories).
🚗 Direct-to-consumer (online and via its showrooms).
💰 Low marketing costs (Tesla barely spends on advertising).
While margins should expand over time through non-auto segments and software solutions/upsell, auto margins have suffered in the past two years due to price cuts required to maintain demand.
Cash flow:
Operating cash flow grew 89% to $6.3 billion.
Free cash flow grew 223% to $2.7 billion.
This was a highlight of the report. Despite heavy spending on AI, Tesla achieved comfortable cash flow margins and can self-fund its autonomous vision.
Guidance:
FY24 improvement: The updated 2024 outlook is for a slight growth in vehicle deliveries in 2024 (previously “notably lower”). It implies a record-breaking fourth quarter to offset the first-half slump. Meanwhile, energy storage deployment is now expected to more than double.
FY25 outlook shocker: In the earnings call, Musk predicted a 20% to 30% delivery growth next year, well ahead of expectations. A more affordable model is expected to launch in the first half of the year. It likely appeased the near-term competitive concerns of many investors.
New products less revolutionary than expected: New affordable vehicles expected in 2025 will build on Tesla’s current platform, achieving less cost reduction than previously hoped. However, the Robotaxi will introduce a brand-new manufacturing approach.
So what to make of all this?
Volumes rebounded after a challenging first half: Deliveries declined nearly 7% in the first half of 2024, but they nicely rebounded in Q3. Prices have stabilized while Tesla continues to lower its unit costs, leading to an auto gross margin improvement. Management focuses on unit volume and keeping the inventory low.
More than EVs: Non-auto segments like Energy and Services were 20% of revenue, up from 16% a year ago. Similarly, roughly 20% of Tesla‘s gross margin came from non-auto segments—nearly doubling from a year ago. As the non-auto segments expand their gross margin profile, they’ll have a more significant impact on Tesla’s bottom line over time.
Operating margin improved by 3 percentage points year-over-year:
🔻 Negative impact: Price cuts (primarily from financing incentives).
🔺 Positive impact: Lower cost per vehicle, growth in non-auto segments, FSD revenue, growth in deliveries, higher regulatory credit revenue.
Free cash flow dramatically expanded, doubling sequentially to $2.7 billion. Capital expenditures rose 43% to $3.5 billion, primarily because of investments in AI compute. Tesla expects to spend over $10 billion on AI this year.
The balance sheet remains stellar, with a nearly $30 billion net cash position. Management believes the company has ample liquidity to finance its product roadmap while maintaining positive cash flow margins.
2. ‘We, Robot’ takeaways
💡 Key insights from the event
Here’s a quick rundown of the recent announcements:
🚖 Cybercab (Robotaxi): Tesla unveiled the long-anticipated Cybercab, a sleek two-seater, but critical details about its tech stack—like sensors and processing power—were notably absent. Musk’s refusal to adopt lidar, a key feature in competitors like Waymo, could raise regulatory concerns (more on this in a minute).
🦾 Optimus (Humanoid Robot): Optimus robots were a crowd-pleaser, serving drinks and dancing, but the spectacle masked how far Tesla is from meaningful industrial applications. Reports confirmed the robots were largely controlled by human operators, raising doubts about their actual level of autonomy.
🚌 Robovan: The surprise of the night was the unveiling of the Robovan, a multipurpose vehicle designed for mass transit and cargo transport. It offers a stylish Art Deco design, but, like the Cybercab, it remained light on specifics—it lacked the concrete plans or technical depth needed to convince investors or analysts that this product is close to reality.
🛞 Full Self-Driving (FSD) Progress: Musk promised that Tesla's Full Self-Driving (FSD) technology would enable fully autonomous driving by 2026, with the Cybercab and Tesla's current models (Model 3, Model Y) leading the way in Texas and California. However, Musk's FSD timelines have been met with skepticism for years, and the presentation offered no new safety data or significant updates to address ongoing concerns about the feature's reliability. Regulatory hurdles and safety issues remain substantial barriers. Tesla has yet to prove its FSD technology is ready for public roads without human supervision, and approval from federal and state regulators remains an unresolved challenge.
📉 Market Reaction: Analysts pointed out the lack of concrete progress and the vagueness of Musk’s promises, which left investors uncertain about how close Tesla is to delivering on its autonomy goals. While some observers found optimism in the futuristic concepts on display, others were less convinced, seeing the event as more style than substance.
✉️ Shareholder Deck Update
🔌 Supercharger Network: Most automakers have adopted Tesla's North American Charging Standard (NACS). This widespread acceptance should boost Tesla's Services segment and increase margins over time. Supercharger stations grew 20% year-over-year to 6,706. Tesla rehired some of the nearly 500 Supercharger team members who were laid off earlier this year.
🌍 Market share: Sequentially, Tesla's market share has stabilized in North America and Europe but noticeably improved in China.
🤖 FSD: Tesla crossed 2 billion miles driven by FSD (Supervised). This data advantage is the crux of the thesis. The company launched the 12.5 version and released Actually Smart Summon, enabling your vehicle to drive to you autonomously in parking lots.
🎓 AI training capacity: Musk still expects nearly 90,000 H100 clusters dedicated to training by the end of this year.
🔋 Energy storage deployments: Tesla's energy storage deployments reached 6.9 GWh in Q3 (but short of the record 9.4 GWh in Q2). The company continues to ramp the 40 GWh Megafactory in Lathrop, with 200 Megapack production in a single week. The Shanghai Megafactory will start shipping Megapacks in Q1 2025 with a 20 GWh run rate. Energy deployments fluctuate due to customer readiness and the location of orders, so the growth can be lumpy.
3. Key quotes from the earnings call
Elon Musk on Cybercab:
“I do feel confident of Cybercab reaching volume production in ‘26. So just starting production, reaching volume production in ‘26. And that should be substantial. And we're aiming for at least 2 million units a year of Cybercab. That'll be in more than one factory, but I think it's at least 2 million units a year, maybe 4 million ultimately.”
For context, Uber has roughly 6 million drivers. So, Musk’s vision is to create a ubiquitous service globally. Of course, Cybercab faces two massive hurdles.
Technology: Can it get to the intended cost and deliver level 5 autonomy?
Regulations: Even then, how long will it take to pass regulatory scrutiny and be allowed on the road? It could face limitations based on geographies, weather conditions, road types, local laws, etc.
“I think having a regular $25,000 model is pointless.”
Musk pushed back on a new low-cost model. Instead, he wants to focus on the Cybercab as the generational leap forward.
On FSD:
“Our internal estimate is Q2 of next year to be safer than human and then to continue with rapid improvements, thereafter. […] So there's no need to wait for a robotaxi or Cybercab to experience full autonomy. We expect to achieve that next year with the—with our existing vehicle line.”
Full autonomy has been promised “next year” for many years and remains contingent on regulations beyond Tesla’s control.
On an existing ride-sharing app:
“For Tesla employees in the Bay Area, we already are offering a ride-hailing capability. With the development app, you can request a ride, and it'll take you anywhere in the Bay Area. We do have a safety driver for now.”
Tesla has been testing the ridesharing app this year. Musk expects to roll out ride-hailing in California and Texas to the public next year, though it will be contingent on regulatory approval state by state.
“I'd be shocked if we don't get approval next year, but it's just not something we totally control.”
On Optimus:
“We're the only company that really has all of the ingredients necessary to scale humanoid robots. […] I think it has a good chance of being the most valuable product ever made.“
Tesla could have a scale advantage combined with its AI research applied from the auto segment to robots. But this is still at an early stage, and it could take many years before the product is ready for prime time.
On valuation:
“My prediction is Tesla will become the most valuable company in the world and probably by a long by a long shot.”
Musk argues that Tesla’s focus on building the future of energy, transport, robotics, and AI is a critical advantage. After all, this is the way he disrupted space travel with SpaceX. In his view, competitors focus only on near-term trends.
4. Waymo, Uber and rideshare future
🚖 Two Paths to Autonomy
Here’s a recap of the SAE levels of driving automation.
Levels of Autonomy: Tesla’s FSD (Supervised) remains at Level 2, requiring driver supervision. Meanwhile, Waymo operates at Level 4 in select cities, where no human intervention is needed under specific conditions. In short, with the Cybercab, Musk wants to jump from Level 2 to Level 5.
Technology Approach: Tesla relies exclusively on cameras and AI, betting that software will solve the scalability challenge. In contrast, Alphabet’s Waymo employs a hardware-heavy strategy with LiDAR, radar, and cameras, which provide more precise navigation but come at a significantly higher cost.
Scaling Challenges: Waymo’s reliance on expensive hardware limits its ability to scale quickly, with each vehicle costing around $200,000. Tesla aims to scale faster by leveraging its existing fleet to train its AI models. However, its timeline for achieving full autonomy has been repeatedly delayed.
Safety and Regulation: Waymo has built trust with regulators by gradually deploying its vehicles, ensuring high safety standards. Yet, it can only operate in a few cities. On the other hand, Tesla faces regulatory hurdles, particularly with the Cybercab, which lacks steering wheels and pedals—making regulatory approval more complicated.
📱 Tesla and Uber: Competitors or Partners?
Uber CEO Dara Khosrowshahi called Elon Musk’s Cybercab vision "pretty compelling" but remains open to partnership. While Uber has teamed up with Waymo to launch autonomous ride-hailing in Phoenix, Atlanta, and Austin, Khosrowshahi hasn’t ruled out collaborating with Tesla’s robotaxi fleet in the future.
Tesla’s Cybercab could either compete with Uber’s platform or, as Khosrowshahi suggests, Cybercab fleet owners might choose to list their vehicles on Uber to maximize earnings. Uber’s reach and ability to cover diverse use cases—across vehicle sizes, geographies, and special needs—could lead to a hybrid model where Tesla AVs appear on Uber.
Tesla could ultimately leverage Uber’s scale and network, given the challenge of reaching a critical size in specific markets. AVs on Uber are already a reality with Waymo, and more will likely come.
⚖️ Regulators Could End Elon’s Dream
Former Waymo CEO John Krafcik was notably critical of Tesla’s Cybercab, calling the design impractical for a serious robotaxi business. He emphasized that Waymo prioritizes accessibility and safety, using taller vehicles and high-mounted sensors. Krafcik also pointed out the lack of critical details in Tesla’s presentation, underscoring that regulatory hurdles remain a major challenge.
For instance, if regulators mandate lidar technology for safety in autonomous vehicles, it could dismantle Tesla’s vision of a camera-only approach overnight. In the end, Musk has pinned Tesla’s future on factors beyond his control.
Musk’s deep involvement in politics and the controversies he has stirred could backfire. By making enemies in influential circles, he risks alienating the very policymakers whose support Tesla needs to realize its ambitious goals. Maintaining strong relationships with regulators is as critical as technological advancements in an industry where regulatory approval can make or break innovation.
The next few years will be crucial for Tesla as it navigates not just technological hurdles but also regulatory challenges that could determine whether Musk's bold vision for autonomy becomes reality—or remains just a dream.
Stay tuned for our breakdown of Uber and Alphabet’s earnings in the coming weeks.
That’s it for today!
Stay healthy and invest on.
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Author's Note (Bertrand here 👋🏼): The views and opinions expressed in this newsletter are solely my own and should not be considered financial advice or any other organization's views.
Disclosure: I am long TSLA, GOOG, NVDA, and UBER in the App Economy Portfolio. I share my ratings (BUY, SELL, or HOLD) with App Economy Portfolio members.
nice article, impressive.
Nobody is discussing that TTM automotive sales this quarter was down 4.7% from a year ago. $74,451 vs. $78,120.
Weird.