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A Tesla Razor and Blades Model Is Unlikely
Tesla's March quarter results took backstage to Elon Musk's earnings call comment that the company could sell vehicles (the hardware) at no profit because they could make "tremendous economics in the future through autonomy" software. This razor and blades model would require investors to rethink the Tesla investment case. In the end, I believe the company will strike a balance between margins and growth similar to what was just reported.

Key Takeaways

Musk's introduces the concept of selling cars at cost to gain share today and make money on FSD in the future.
I believe they will strike a balance between margins and growth similar to what was just reported in March.
Musk still thinks they have an “outside case” for 2.0M this year and feels comfortable with company guidance of 1.8M.
The Cybertruck is on track to start deliveries in September along with more hints of new models.

Tesla as a razor and blades model

Going into earnings, investors were even more focused on profitability than in a typical quarter. The reason is the central profitability metric, auto gross margins ex credits, came in below expectations for the December quarter (24.3% vs. the Street at 26.8% ) which led to investors bracing for March results. Those results were a slight disappointment, coming in at 19% compared to Street expectations of 20%. Disappointing the key metric two quarters in a row needed explanation, and Elon provided it on the earnings call.

CFO Zach Kirkhorn declined to give an auto gross margin target for the June quarter, a change from what he offered last quarter because there are factors outside the company’s control when it comes to margins, notably interest rate impact on demand and materials costs.

Musk stepped in with additional context adding, “Tesla is in a uniquely strong strategic position. Because we’re the only ones making cars that technically, we could sell for 0 profit for now and then yield actually tremendous economics in the future through autonomy, no one else can do that. I’m not sure how many people will appreciate the profundity of what I’ve just said, but it is extremely significant.”

The idea is to sell the hardware (mostly cars) at no profit, so they can sell the software (FSD) at such a high margin that it increases a car’s overall profitability. This approach is dependent on the availability of FSD which Musk still believes will be out by the end of the year. Given the track record on the topic and regulatory concerns about wide FSD deployments, I see it more likely becoming available in three to five years’ time. Regardless of the timing of the FSD release, the new model will get instant creditability from investors as soon as it goes live.


The golden goose: near-term profits fund growth

When I heard Musk’s comment I was unsure if the company was introducing investors to a new business model or if it was Elon trying to make a point that a decline in profitability in the near term could set the stage for higher profitability in the long term. I believe he was going for the latter, and the company has no intention of trashing margins to gain market share.

My read is based on Kirkhorn’s investor day comments on March 1st that call for $150B to $175B of investment over the next decade. To achieve that level of investment, I believe they need to maintain greater than 15% operating margins and ramp revenue at the same time. Cutting near-term profits would jeopardize the company’s long-term goals.


Musk's guidance

Formal guidance still calls for 1.8M deliveries which implies delivery growth will decrease to 37% y/y in 2023 from 40% in 2022. That said, on the December quarter conference call, Musk threw the formal guide out the window when he revealed the company’s internal target is closer to 2.0M deliveries this year.

On the March call, Musk made a tweak to his language on the topic calling the goal an “outside case.” While I read it as a slight step back from what he previously said, the 2.0M is still on the table and likely a function of upcoming price cuts. At current pricing, I think it’s unlikely they get there.

Regardless of if the company delivers 1.8M or 2.0M this year, it will still outpace the auto industry growth. In the March quarter, the top 6 traditional automakers grew deliveries by 9.8%, compared to Tesla up 36%. Tesla grew 3.7x faster than the group, compared to a 4-5x range over the past four years.


Cybertruck and other models are in the works

Included in the company’s formal outlook was commentary to anticipate Cybertruck production to begin later this year (late in the September quarter) which is in line with previous comments. Even though that’s a long way out, the company appears to be positioning itself to ride Cybertruck’s ramp in 2024 and the Model A ramp in 2026, giving hope to investors that the delivery growth party will only continue.

Additionally, Tesla reiterated they are working on the next-generation vehicle platform, which Musk revealed is internally called “robotaxi,” but left the door open for the price to be higher given there could be a “Model 3 or Model Y robotaxi, a robotic taxi.”


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