Tesla’s Margins Plunge 42% in Two Years Amid Heavy AI Investments

Tesla’s financial struggles continued in Q2’2024 as the company’s profit margins shrank. Despite CEO Elon Musk’s focus on advancing autonomous technology, Tesla’s operating margin has dropped by over 40% in two years. This is according to an analysis by Stocklytics.com.

The site’s financial analyst, Edith Reads, comments:

With the EV market’s maturation, Tesla has seen a great decline in its shipments. Moreover, its growing priority for AI investments has consumed much of its operating expenses. These investments, while promising in terms of future growth and competitive advantage, have placed a significant strain on Tesla’s financial resources.

Stocklytics financial analyst, Edith Reads

Tesla’s Profit Drop

The Austin, Texas-based company reported a 25% profit margin in Q2 ’22, with roughly 400,000 deliveries. From then on, Tesla’s profit margin plummeted to below  20% throughout 2023.

In Q1’24, the profit-falls narrative continued as Tesla’s vehicle deliveries slipped by nearly 9%, bringing the company’s profits to $1.1 billion, down from $2.51 billion a year ago. The drop in Q1 was partially contributed by shipment disruptions erupting from Houthi attacks on shipping in the Red Sea. The attacks’ effects sunk in when the Texas manufacturer closed its factory just outside Berlin towards the end of January due to delayed supply. Not to mention, Tesla was hit hard by an environmentalist arson attack on one of its factories in Germany.

Q2’24 marks Tesla’s lowest profit margin in five years and a 42% drop from Q2’22. The electric vehicle manufacturer’s operating margin was down to 14.6%, with less than 300,000 deliveries to show for it. Tesla’s quarterly income equated to 52 cents a share, disappointing analysts who had hoped for 61 cents a share for the company in Q2. 

Moreover, Tesla’s shares were also greatly affected, with the EV supplier reporting a nearly 12% share decline on July 24. 

Why Tesla is On a Downward Spiral?

EV discounts and hefty AI spending are hammering Tesla’s profit margin. Throughout 2023 and much into 2024, Tesla has prioritized its work in self-driving cars and humanoid robots. As a result, the Austin-based company has had to battle with escalated expenses as AI investments drive up operating costs.

Elon Musk, Tesla’s CEO, defended the company’s priorities on AI, stating that Tesla ‘should be considered an AI robotics company.’ He added, “If somebody doesn’t believe Tesla is going to solve autonomy, I think they should not be investors.”

Meanwhile, the company faced a slow-paced EV sales growth amid fierce competition from new EV manufacturers. The company then retaliated against the sales drop with a series of price cuts on its top EVs and even introduced incentives, such as low-interest loans. However, the price slash took a toll on the company’s earnings in Q2 ’24, contributing to a further drop in net income.

Vaibhav Taneja, Tesla’s chief accounting officer, remarked on the slip in Q2 profit margins, “Affordability remains top of mind for customers. We offered attractive financing options to offset sustained high interest rates.”