It’s all about margins. Gross margins are central to the Tesla investment case because the metric best gauges whether the company is on track to be valued as a tech company or just another automaker. Tech companies have higher valuations because they have higher margins. Tech margins are higher because of the ability to use hardware to sell higher-margin software and services.
While I had previewed a miss on gross margin in September, the magnitude of the miss was greater than I had expected. Even worse, the potential for margin improvement over the next year was essentially taken off the table, given the cost of ramping Cybertruck production along slowing demand for vehicles which reduces manufacturing efficiencies.
For the quarter, auto gross margins ex credits fell to 16.3%, lower than the Street consensus at 17.6% and down from 18.1% in June (and 29% from a year and half ago). While this drop is concerning, Tesla still holds a slight advantage over other carmakers with a 10-14% gross margin.
The bottom line when it comes to margins is that investors will likely have to wait a year before they start to improve. And the slope of improvement will be gradual. Once we get through the ramp of Cybertruck—which takes us into 2025—the investment phase for Robotaxi will begin. Putting it together, it may not be until 2030 that we see margins return to the 29% peak. The biggest unknown on the margin-expansion path is when contribution from high-margin FSD revenue steps up.