Tesla will face a "major test" in the first quarter: Profit margins are expected to decline, focusing on the product roadmap

According to the VESYNC Financial APP, Tesla (TSLA.US) will announce its first-quarter financial report after the close of trading this Tuesday. With investor sentiment declining, Tesla will provide much-needed latest information on the current situation and future prospects.

Bloomberg's consensus forecast is for Tesla to report an adjusted earnings per share of $0.52 this quarter, with revenue of $22.31 billion. This will be the first revenue decline for Tesla in four years.

In terms of profitability, Tesla is expected to achieve an operating profit of $1.49 billion, a 40% decrease from the same period last year. Using the non-GAAP measure, Wall Street analysts expect an adjusted net profit of $1.79 billion and EBITDA of $3.32 billion.

According to a survey of 20 analysts by Visible Alpha, Wall Street expects Tesla's automotive gross margin, excluding policy offsets, to be 15.2%, lower than the 19% in the same period last year, marking the lowest since the fourth quarter of 2017.

Slowdown in Demand Raises Questions

Tesla's performance in the first quarter can be described as a roller coaster. The company's disappointing fourth-quarter results, weak and vague 2024 delivery guidance, lower-than-expected first-quarter deliveries, and failure to refute reports of the demise of mass-produced electric vehicles below $30,000 have severely impacted its stock price.

As of Monday's close, Tesla's stock price has fallen by about 43% year-to-date, dropping 19% in the current seven-day decline.

Currently, Tesla's sales growth is slowing down, and it is expected to have a significant impact on the performance to be announced on Tuesday. Tesla's first-quarter deliveries fell short of expectations. In the first quarter, Tesla delivered 386,810 vehicles globally, well below the expected 449,080 vehicles; production was 433,371 vehicles, also lower than the expected 452,976 vehicles.

With a difference of about 46,500 vehicles between production and deliveries, investors are concerned about Tesla facing weakening global demand, leading to rounds of price cuts. Last weekend, Tesla announced a series of price cuts for its Model 3, Model Y, and other models globally, further eroding profit margins

The Rumored Model 2

Investors will also be watching Tesla's future product roadmap. The long-awaited next-generation platform is expected to support mainstream electric vehicles priced below $30,000 (referred to as Model 2), which will be produced at low cost using a revolutionary "plug-and-play" production line.

Investors are hopeful for the sales growth of Model 2, as Musk had previously promised to launch this low-cost car in 2025. The CEO may face sharp questions from investors about the fate of Model 2 during the conference call after the financial report.

However, earlier in April, foreign media reported that Tesla had canceled the Model 2 plan and shifted focus to manufacturing self-driving robot taxis, Robotaxi, on the same small car platform. Musk initially called this "a lie" on social media, but has not yet pointed out any falsehoods or clarified the fate of the model.

Graham Tanaka, portfolio manager of Tanaka Growth Fund, has been bullish on Tesla stock since the early days, but currently, due to the uncertainty of Model 2 and the slow production of Cybertruck electric pickup, he has liquidated his remaining positions in the past few days.

"Model 2 was supposed to be Tesla's moat, but at least it has been delayed for now," he said. "We believe that holding Tesla next year carries greater risks because we don't know how fast the Cybertruck will be produced."

It is understood that Musk was originally scheduled to meet with Indian Prime Minister Narendra Modi on Monday and announce a significant investment in a car factory that was expected to produce a small, affordable model. However, Musk canceled the meeting at the last minute citing "heavy responsibilities at Tesla."

There are analysts who are optimistic about Model 2. Emmanuel Rosner from Deutsche Bank wrote in a report earlier this month that Model 2, as a mass-produced model, will "drive sales, profit margins, and FCF (free cash flow) growth acceleration." This also means that Tesla's "bull case" is built on Tesla cracking the code for autonomous driving, which requires overcoming a series of regulatory hurdles and obtaining enough data to train the software.

Analysts like John Murphy from Bank of America believe that Model 2 is not dead.

"During the Q4 24 earnings conference call, management mentioned that the car is under development, with an optimistic SOP (start of production) in [2nd half of 2025], but CEO Elon Musk acknowledged that due to the introduction of new technologies, the production process may be slower than expected," Murphy wrote in a note to clients on Monday. "In our view, Tesla is still developing Model 2 as it is a fundamental part of the company's growth story

Robotaxi Creating the Future?

It is undeniable that Tesla is still the most valuable car manufacturer in the world, with a market value of about $468 billion, but it has dropped by two-thirds compared to the historic high set in November 2021. Historically, Tesla's valuation has been mainly based on the large-scale sales of electric vehicles and the breakthrough progress in autonomous driving vehicles.

Since the foreign media reported on the Model2 strategic shift, analysts have noticed that this change may lead to investors who bet on rapid sales growth to flee the company's stock. Analysts say that these investors are likely to be replaced by others who are willing to wait for Tesla's autonomous driving.

For years, Musk has been predicting the imminent arrival of fully autonomous driving vehicles, but due to significant engineering and regulatory challenges, it may still take several years to achieve. Tesla is facing lawsuits and investigations regarding its autonomous driving and fully autonomous driving systems, which do not make the cars fully autonomous.

Musk's recent posts on social media about Tesla's autonomous driving car strategy have raised more questions. He recently joked that "Robotaxi" will be unveiled on "August 8th," probably referring to August 2024. He later tweeted that being "stuck on autopilot" in autonomous driving is a "very obvious" move.

To spark consumer interest, Tesla recently offered a free trial of "full self-driving" and reduced the price of this option from $12,000 to $8,000 last weekend.

The Cybertruck will also attract widespread investor attention. Tesla hopes to increase sales and profit margins, but its latest model, the Cybertruck, may not be of much help, as it has proven difficult to mass-produce. The company did not separately report the production numbers of this pickup truck, but it recalled nearly 3,900 vehicles produced from November last year to April this year last week.

On Tuesday, investors may seek guidance on whether Musk will stick to his target of producing 200,000 Cybertrucks by 2025. Musk has stated that this model will not generate positive cash flow before 2025.

In addition to the above concerns, the car manufacturer may also face other questions, such as the dilemma of mass-producing the newer 4680 batteries that Tesla needs for the Cybertruck and hopes to deploy in other models to reduce costs. However, as Tesla began to swing the layoff axe last week, expecting to lay off over 10% of its employees, Tesla's battery chief, Andrew Baglino, also resigned last week.

Finally, Tesla may discuss (or may be asked about during the conference call after the financial report) other key business matters, such as the recent announcement of layoffs exceeding 10%, and the management's stance on the upcoming shareholder vote in June. These votes involve changes in Tesla's state of incorporation and whether to approve Musk's controversial 2018 compensation plan invalidated by a Delaware court