Tesla struggles with margins as R&D spending rises, vehicle costs drop

The news: Tesla’s Q4 earnings showed solid revenue growth but missed expectations amid growing competition in the EV market and price cuts in Tesla’s core automotive business.

• The company reported $25.7 billion in revenues, up 2% YoY but below analysts’ expectations of $27.3 billion.
• Tesla’s automotive revenues declined 8% YoY to $19.8 billion, led by reduced selling prices.

Tesla shares fell about 6% in after-hours trading Wednesday before bouncing back Thursday.

Balancing the margins: EV sales continue to struggle broadly, largely due to their price tags, but Tesla CEO Elon Musk said his company is on track to launch a “more affordable” model in the first half of the year.

However, rising R&D spending is cutting into Tesla’s margins. Its R&D investments grew 16% YoY to $1.3 billion in Q4 as it expanded its full self-driving (FSD) technology and into AI.

Scaling challenges: Production bottlenecks could hinder Tesla’s goal of producing 2 million vehicles in 2025.

• Musk said the company is facing production constraints for its battery packs that teams are still figuring out how to address.
• Production for the new Model Y is expected to start next month, but Tesla said that factory retooling will cause several weeks of lost manufacturing to further affect margins.

Autonomous hopes: Musk said Tesla’s robotaxi service will launch in June in Austin, though it will be tested within its internal fleets rather than by consumers.

• Musk said the only thing holding back FSD release is “an excess of caution” and a safety expectation beyond that of the average human driver.
• “The standard has to be very high because at the moment … if somebody scrapes (their) shin with an autonomous car, it's headline news,” Musk said.

Geopolitical issues: Tesla sales could take a hit this quarter following a Polish government minister’s call for a Tesla boycott after Musk appeared virtually at a German rally for the far-right Alternative for Germany party and said that the country should move beyond its “past guilt.”

Musk’s political stances have previously affected X’s user base and advertisers.

Our take: Despite missing revenue expectations, Tesla’s stock is holding steady, indicating that investors are confident in Musk’s visions for Tesla and how his relationship with President Donald Trump will help Tesla navigate a shifting regulatory environment.

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