Tesla：AI Ambitions Clash VS Automotive Fundamentals

$Tesla(TSLA.US) released its Q4 2024 report after the U.S. stock market closed on January 30th, Beijing time. Here are the key points:

1. "Collapse" of the Q4 automotive fundamentals: This quarter, automotive revenue was $19.8 billion, below market expectations of $21.7 billion! The actual vehicle sales revenue (excluding regulatory credits) was nearly $1.9 billion lower than market expectations, primarily due to a decline in vehicle selling prices. The average selling price fell by $2,200 quarter-on-quarter to $39,800, marking the largest quarter-on-quarter decline since 2024, significantly lower than the market expectation of $41,400.

2. Automotive gross margin hits a new low: In both the U.S. and Chinese markets, Tesla did not lower prices for existing models, so Dolphin believes the significant drop in selling prices mainly resulted from financing promotions, discounts on inventory vehicles, and older Model Y discounts, along with a slight negative impact from the shipment structure.

Although the cost per vehicle was also reduced this quarter, the extent of the savings was clearly insufficient to offset the significant decline in selling prices. Ultimately, the automotive business gross margin (excluding carbon credits) was only 13.6%, setting a historical low! This is significantly below the market expectation of 16.2%.

3. Uncertainty remains for the 2025 automotive fundamentals: Unlike last quarter when Musk provided a sales guidance of a 20%-30% year-on-year increase for 2025, this quarter's earnings call did not reaffirm the sales guidance, only mentioning that sales would return to positive growth in 2025, indicating that the fundamentals of the vehicle sales business in 2025 still face significant uncertainty.

4. Operating expenses continue to grow, and operating profit margin has dropped to single digits: Due to the severe decline in automotive gross margin this quarter, the overall gross margin also fell, and operating expenses actually increased quarter-on-quarter (due to increased AI spending leading to higher R&D costs). Ultimately, this quarter's operating profit was only $1.6 billion, down $1.1 billion quarter-on-quarter, significantly below the market expectation of $2.54 billion.

5. The next "growth engine" still lies in the AI narrative: With the significant uncertainty in the 2025 automotive fundamentals, Musk's AI narrative continues to unfold. The relaxation of regulatory factors for autonomous driving in the U.S., potential improvements in FSD performance and penetration rates in 2025, the upcoming launch of Robotaxi in June 2025, and the mass production plan for Optimus have become Tesla's next "growth engine."

Dolphin's overall view:

The "collapse" of the automotive business fundamentals in this financial report speaks for itself, while the focus is on Musk's guidance for 2025 vehicle sales: only mentioning that sales will return to positive growth in 2025, without reaffirming the previous quarter's guidance of a 20%-30% year-on-year increase in Tesla's sales for 2025, undoubtedly indicates that,Tesla's automotive fundamentals still face significant uncertainty in 2025, and it is evident that Tesla's strategic focus has largely shifted from vehicle manufacturing to the "AI narrative."

However, as previously mentioned by Dolphin, even if all optimistic expectations regarding mature autonomous driving technology are fully realized (extremely optimistic assumptions), Tesla's market value would only be around $1.4 trillion (implying a 2025 P/S ratio of 11 times). Currently, the market has clearly priced in too many uncertain future elements for Tesla, and the "Musk premium" has reached a historical peak.

From the current stock price trend, the impact of automotive fundamentals on Tesla's stock price is increasingly diminishing and is no longer the focus of short-term attention. This means that the factors that can truly determine Tesla's stock price and the next generation of its "growth engine" still lie in Musk's expectations and the actual implementation effects of Tesla's "AI narrative."

Regarding the narrative of the AI story, this earnings call did not provide any core incremental information about AI:

On the FSD story: It remains that Robotaxi will begin deployment in Austin in June 2025, mainly benefiting from the performance improvements of FSD V13 (the deployment of the Austin Cortex training cluster brings a significant increase in computing power and accelerates the iteration speed of end-to-end models), as well as the relaxation of regulations on autonomous driving in the U.S.

On the Optimus story: It is expected that 10,000 robots will be built internally by 2025, possibly achieved before the end of the year, mainly to undertake production tasks at Tesla's factories. In 2026, the production phase 2 robot will be launched to realize more scenarios, with external sales expected in the second half of 2026.

The core points for observing the implementation of the AI story may become potential catalysts for the stock price in 2025:

On the FSD story:

Whether FSD penetration can significantly increase: Currently, the FSD penetration rate is only around 10% in Q4 (a decline from the 20% penetration rate when V12 was just launched), while the target for FSD conversion rate with V13 is set at 30%, mainly by cultivating user mindset through the Robotaxi experience, thereby enhancing FSD penetration.

Whether FSD can accelerate deployment in Europe and China: However, currently, in China, the implementation of FSD still faces significant obstacles—U.S. regulations do not allow computing power to be exported, while China does not allow training data to be exported. Tesla still hopes to transfer Chinese driving data to the U.S. for testing. In Europe, regulatory approvals also face considerable uncertainty.

Whether FSD has begun third-party licensing.

On the Optimus story: Whether the mass production implementation and cost control are as expected.

The following is a detailed analysis of the financial report:

1. Tesla: Overall revenue and gross margin significantly below expectations!

1.1 Overall revenue below market expectations, with the issue lying in vehicle sales revenue

In Q4 2024, Tesla's revenue was $25.7 billion, significantly below the BBG sell-side consensus expectation of $27.4 billion, resulting in an expected difference of about $1.7 billion, with the key issue lying in the critical vehicle sales revenueIn the automotive business, total revenue for this quarter was 19.8 billion, and after removing carbon credits and leasing income, the actual automotive sales (excluding carbon credits) were only 18.7 billion, significantly lower than the BBG expectation of 20.5 billion. While total delivery volume increased by 7% compared to the previous quarter, revenue from the automotive business continued to decline quarter-on-quarter, mainly due to a significant drop in the average price of vehicles this quarter.

In other businesses, although the energy and service sectors slightly exceeded market expectations, they still could not compensate for the "big hole" in the vehicle manufacturing business this quarter.

1.2 The gross margin from car sales is significantly lower than expected, leading to an overall gross margin below expectations

Every earnings report, the most critical and truly incremental information has always been the performance of automotive gross margins. This quarter, the gross margin for the automotive business surprisingly hit a historical low, dropping sharply from 20.1% in the previous quarter to only 16.6% this quarter! This is significantly lower than the market expectation of 18.8%!

In other businesses, the shipment volume of the energy storage business continued to grow significantly quarter-on-quarter, but due to a slight decline in average prices, the gross margin returned to a stable level of around 25%, slightly below the market expectation of 27.9%.

The service business, due to the continued expansion of the supercharging network in North America (covering non-Tesla users), may not have high utilization rates for the newly added charging stations, which somewhat dragged down the gross margin. The gross margin for the service business was 4.2%, lower than the market expectation of 7.6%.

II. The "collapse" of the vehicle manufacturing business fundamentals

2.1 Automotive gross margin is significantly lower than expected!

As the most important observation indicator each quarter, the automotive gross margin is crucial, especially given the aging of Tesla's existing models and increasing competition. To clarify the true situation of the automotive gross margin, Dolphin has separately broken down the automotive sales gross margin excluding carbon credits, the automotive leasing gross margin, and the overall gross margin of the automotive business.

Since the automotive leasing business is small in scale and has stable gross margins, the overall gross margin for vehicles is a combination of the two. This detailed breakdown is mainly to observe the automotive sales gross margin excluding carbon credits.

The gross margin for automotive sales in the fourth quarter (excluding carbon credits and leasing) was only 13.6%, a quarter-on-quarter decline of nearly 3.5 percentage points! It was even lower than the lowest point of the automotive business gross margin in Q2 2024, significantly below the BBG consensus expectation of 16.2% and the buyer expectation of 15% that Dolphin observed!

Therefore, the key question here is, why has Tesla's automotive business gross margin returned to a historical low this quarter? Why has the decline been so significant? Let's take a look from the perspective of unit economics:

2.2 The "collapse" of the selling price per vehicle is the main reason:

From the perspective of the selling price per vehicle, in the fourth quarter, Tesla's revenue per vehicle sold (excluding carbon credits and vehicle leasing sales) was $39,800, a decline of $2,200 from $42,000 in the third quarter, marking the largest quarter-on-quarter decline since 2024! Meanwhile, BBG's consensus expectation for the 4Q24 vehicle price is only a slight quarter-on-quarter decline to $41,400.

Let's examine the reasons for the decline in selling price per vehicle:

① Price adjustments for existing models: In the two largest markets, the U.S. and China (which accounted for 72% of total deliveries in Q4), Tesla did not implement an overall price reduction in the fourth quarter.

a. United States: In the U.S., Tesla did not lower prices for its main models, Model 3/Y, and even discontinued the lower-priced Model 3 Standard version, while slightly increasing the price of Model S.

b. China: Similarly, in China, Tesla also did not lower prices for its main models, Model 3/Y, in the fourth quarter.

c. Europe: There was a slight price reduction for Model 3 (due to the EU imposing only a 9% tariff on Tesla, which was better than expected), but higher-priced long-range and high-performance versions were introduced as a hedge, with no price reduction for Model Y.

② However, the increase in financing promotions, inventory vehicle discounts, and discounts on older Model Y models may be the main reasons for the decline in the average vehicle price this quarter:

a. United States: Financing loans continue to increase, while inventory vehicle discounts are offered:

Financing loan rates continue to decrease: Tesla has intensified financing loan promotions in Q4, offering 0% loans for the Model 3/Y in the U.S., compared to a loan rate of 1.99% in Q3.

Inventory vehicle discounts resume: The inventory vehicle discounts on Tesla's website, which were canceled in April, have been restored in Q4, with discounts on inventory vehicles reaching up to $4,000.

b. China: A new subsidy of 10,000 yuan for the Model Y was added at the end of November, preparing for the new Model Y launch in early 2025.

In terms of loan rates, Tesla continues to offer 0% loans for 5 years on the Model 3/Y, consistent with the previous quarter.

However, at the end of November, Tesla added a subsidy of 10,000 yuan for the Model Y, mainly in preparation for the updated Model Y in early 2025.

③ In terms of model structure, the proportion in the China region has slightly increased, which may have a slight negative impact on the average price.

a. The proportion of Model 3/Y in the overall model structure has slightly increased compared to the previous quarter, but only by 0.2 percentage points, which has a minimal impact.

b. The proportion of deliveries in the China region in Q4 has slightly increased, while the proportion of standard version models chosen in the China region is relatively high, and the selling price per vehicle is lower than in the U.S. region, which may bring some negative effects.

2.3 The cost per vehicle continues to decline month-on-month due to the ongoing decrease in raw material costs, but it still cannot save the "collapse" of the selling price per vehicle.

After discussing the vehicle price, let's turn to the vehicle cost. Generally speaking, Tesla's cost reduction comes from four dimensions—1) scale dilution from released sales, full utilization of production capacity; 2) technological cost reduction; 3) natural cost reduction of battery raw materials; 4) government subsidies. Specifically:

Dolphin 君 breaks down the cost per vehicle into vehicle depreciation and variable costs, and the economic account for Q4 is as follows:

1) Vehicle depreciation effect: Q4 sales increased by 7% month-on-month, but the absolute value of vehicle depreciation slightly increased by $100 month-on-month. Dolphin 君 believes this is mainly due to the decline in the contribution ratio of the Shanghai factory this quarter, as the proportion of models produced in the Shanghai factory for export has decreased (mainly to Europe). Given that the Shanghai factory has a stronger manufacturing cost advantage compared to European and U.S. factories, the decline in per vehicle depreciation costs due to scale effects did not manifest this quarter.

2) Variable Cost per Vehicle: The variable cost per vehicle in the fourth quarter is $31,700, a decrease of about $500 compared to the previous quarter. Dolphin believes this is mainly due to the continued decline in raw material costs. Tesla's renegotiation of raw material procurement contracts may continue to impact the fourth quarter. The decline in variable costs per vehicle last quarter was the main reason for the automotive gross margin exceeding expectations.

3) Automotive Gross Margin Hits Historic Low: Ultimately, although the decline in variable costs this quarter led to a reduction in overall manufacturing costs, the extent of the decrease is clearly not large enough (only down $400 quarter-on-quarter). Meanwhile, the average selling price of vehicles fell by $2,200 due to financing incentives and discounts on inventory vehicles, which still could not save the "collapse" of the selling price. As a result, the selling gross margin for vehicles reached a historic low.

III. What is Tesla's Growth Engine for 2025?

3.1 Fourth Quarter Deliveries Still Below Market Expectations, Deteriorating Manufacturing Fundamentals

In the fourth quarter, although Tesla provided various incentives to stimulate vehicle sales, leading to a significant drop in vehicle prices, the sales volume only reached 496,000 units, below the seller's expectation of 510,000 units. Looking at a longer time frame, due to the aging of Model 3/Y vehicles, the marginal effect of the "price-for-volume" strategy is gradually weakening, which may even lead to both the selling price and sales volume in the fourth quarter falling below expectations, resulting in a collapse of the manufacturing fundamentals.

From Tesla's market share in various regions, the market share continued to show a downward trend in the fourth quarter, with manufacturing fundamentals continuously deteriorating. Tesla urgently needs a new growth engine.

3.2 Growth Engine ①: The Manufacturing Fundamentals for 2025 Still Face Significant Uncertainty

In 2024, the overall vehicle sales volume is projected to be 1.79 million units, marking the first negative growth compared to 1.81 million units in 2023. It can be seen that under the aging of existing models, Tesla's selling prices have been continuously declining, and it can only rely on constantly compressing costs to stabilize profit margins. The selling profit margin also hit a historic low in the fourth quarter, and Tesla urgently needs new vehicles to reverse the manufacturing fundamentals.

a. Sales Side: Musk Only Mentioned That Vehicle Sales Will Return to Positive Growth in 2025, Without Reiterating the 20%-30% Year-on-Year Growth Plan

Looking ahead to 2025, driven by the new vehicle cycle, it is highly likely that Tesla's sales will return to positive growth. However, recalling Tesla's previous earnings call, it was expected that sales in 2025 would grow by 20%-30% year-on-year, implying total sales of 2.15-2.33 million units in 2025, mainly driven by the launch of the new generation of affordable Model 2.5.

In this earnings report and conference, Musk did not reiterate the 20%-30% sales growth expectation for 2025, only mentioning that vehicle sales would return to positive growth, which seems to indicate that Model 2.5, a crucial vehicle for Tesla's sales growth plan in 2025, carries significant uncertainty regarding its sales volumeThe consensus expectation from sell-side analysts on BBG for 2025 sales is only 2.07 million units, while the expectations from major institutions observed by Dolphin are only around 1.95 to 2.05 million units. This indicates that the current market expectation for sales growth in 2025 is closer to 10%-15%, lower than the 20%-30% growth mentioned by Musk previously.

Dolphin believes that the low market expectations for Tesla's sales in 2025 and the uncertainty in sales mainly come from two aspects:

① The potential cancellation of the IRA affecting the demand for Tesla models in the U.S.:

The reduction of the $7.5K IRA tax credit effectively raised the price of Tesla vehicles in the U.S. by about 12%. This reduction may take effect in the second half of 2025 and will directly impact the demand for Tesla models in the U.S. After the cancellation of the IRA, Tesla must reassess the balance between sales and profit margins for existing models Model 3/Y (IRA subsidy reduction or cancellation: ① Tesla raises prices, sales decrease to maintain gross margin; ② Tesla maintains current prices, sacrificing gross margin to preserve sales).

② The uncertainty in sales brought by Model 2.5:

Dolphin previously mentioned in "Is Musk Really Going to Scrap the $25,000 Model 2?" that the Model 2.5 is likely a transitional product with stable deliveries, and the cost reduction is not driven by technology but is more likely a selectively downgraded version. In the increasingly fierce competition for low-priced models in the Chinese market, the demand for this Model 2.5, which primarily focuses on downgrading features, remains uncertain.

b. Automotive business gross margin: Although 2025 is a year for new products, it may be impacted by the low-priced Model 2.5 and the reduction of IRA subsidies:

① The low price of Model 2.5 and its production on existing production lines are expected to limit gross margins: Due to the low pricing of Model 2.5 (below $30,000 after IRA subsidies) and its production based on existing production lines, the cost squeezed from current production lines and suppliers will be limited, resulting in inherently lower gross margins, especially during the ramp-up phase after its launch.

② The potential reduction of IRA subsidies may force Tesla to balance between sales and vehicle gross margins, and management has previously stated that they would consider overall gross margin increment rather than gross margin percentage. Since the new models will use HW4.0 version for autonomous driving hardware, which is more compatible with FSD software, the potential for achieving full autonomous driving will be greater. Therefore, management is more willing to increase the proportion of HW4.0 models, which means that the focus is likely more on increasing new vehicle sales in 2025 rather than maintaining gross margins. It is expected that the automotive business gross margin may continue to decline3.3 Growth Engine ②: FSD Remains a Key Focus for Tesla's 2025 Deployment

In the articles "Ultimate Question: Can FSD Really Support a $15 Trillion Tesla?" and "Tesla FSD: Can the Stars and Sea Withstand Reality's Test?," Dolphin has detailed Tesla FSD's progress, future plans, and its valuation contribution to Tesla.

From the current progress of version 13, we indeed see breakthroughs in FSD V13 compared to the previous generation V12.5 (the significant intervention mileage has increased by 2-3 times), and the main reason for this breakthrough is the completion and significant increase in computing power deployment, which has accelerated the training speed of the end-to-end model. (In Q4, a training cluster Cortex composed of 50,000 H100s was deployed in Texas, increasing the data volume by 4.2 times, improving video input resolution, and reducing latency by 2 times, etc.)

Since FSD is crucial for Tesla in 2025, but the end-to-end route still has black box properties, making it impossible to predict the nodes for significant improvements in FSD performance, it is still necessary to closely observe the order rate of FSD.

Similarly, the launch of FSD in Europe and China is also critical and is a potential catalyst for Tesla's stock price in 2025.

Regarding the deployment of Robotaxi, Tesla is expected to launch an unsupervised version of the Robotaxi service in Austin, Texas, in June, and will subsequently launch it in California, primarily focusing on small-scale deployments (using existing Model 3/Y vehicles).

Source: FSD Tracker

3. Expenditure Side: Operating Expenses are Increasing, Operating Profit Margin Below Expectations

Tesla's R&D expenses and selling expenses have continued to increase this quarter, with R&D expenses at $1.28 billion, higher than the market expectation of $1.11 billion, expected due to increased investments in AI intelligence and new vehicle series development. Selling and administrative expenses this quarter were $1.31 billion, still slightly above the market expectation of $1.29 billion

The overall operating profit for this quarter is 1.58 billion, which is a decrease of nearly 1.2 billion compared to the previous quarter, significantly lower than the market expectation of 2.5 billion, mainly due to a sharp decline in gross margin and a quarter-on-quarter increase in operating expenses.

In terms of free cash flow, although inventory decreased this quarter (the production-sales gap decreased by 36,000 vehicles, leading to a reduction in inventory), the inventory turnover days also decreased, which would be beneficial for free cash flow. However, the significant decline in operating profit resulted in a further quarter-on-quarter decline in operating cash flow by 1.4 billion.

Due to the fact that Tesla's FSD computing power deployment has basically reached a stage of completion, capital expenditure this quarter decreased to 2.78 billion from the peak of 3.5 billion in the previous quarter, resulting in free cash flow of 2 billion this quarter, a quarter-on-quarter decline of 700 million.

4. Energy business continues to grow rapidly, service business progresses normally

4.1 Energy business continues to grow rapidly

Tesla's energy storage and photovoltaic business includes selling photovoltaic systems and energy storage systems to residential (to C), small commercial, large commercial, and utility-level customers (to B).

In the fourth quarter, it achieved operating revenue of 3.06 billion, slightly higher than the market expectation of 3.02 billion. This quarter, energy storage shipments continued to grow significantly, reaching 11 GWh, a quarter-on-quarter increase of nearly 60%. With the Shanghai energy storage super factory starting mass production in the first quarter of 2025, Tesla expects energy storage deployment to achieve a 50% year-on-year growth in 2025 (over 60 GWh in 2025).

Due to a slight decrease in the unit price of energy storage this quarter, the gross margin for energy storage slightly declined to 25.2%, slightly lower than the market expectation of 27.9%.

4.2. Service business progresses normally

In the fourth quarter, Tesla achieved service business revenue of 2.85 billion, a quarter-on-quarter increase of 2%, basically in a steady progress state, while the gross margin for this quarter decreased to 4.2%, lower than the market expectation of 7.6%. This may be due to the addition of over 3,000 supercharging stations in the fourth quarter, with the utilization rate of new charging stations still steadily increasingTo some extent, it has dragged down the gross profit margin.

For historical articles by Dolphin Jun, please refer to:

Hot Topics:

On October 25, 2024, "Is Musk really going to tear up the $25,000 Model 2?"

In-depth Research:

On January 8, 2025, "The ultimate question, can FSD really support a $1.5 trillion Tesla?"

On January 2, 2025, "Tesla FSD: Can the stars and the sea withstand the test of reality?"

On December 3, 2025, "Tesla's 'dark maneuver', is the Robotaxi story just a 'ruse'?"

Financial Report Commentary:

On October 24, 2024, financial report interpretation "The 'King of Drawing Cakes' Tesla has finally returned as a king!"October 24, 2024 Earnings Call: Tesla: Committed to Delivering Affordable Models in the First Half of 2025

July 24, 2024 Earnings Interpretation: Tesla: "AI Pie" Sounds Good, But Reality is Too Harsh

July 24, 2024 Earnings Call: Expected Capital Expenditure Exceeds $10 Billion for the Year, Will Continue to Strengthen Investment in AI Chips

April 24, 2024 Earnings Interpretation: FSD Contributes a Masterstroke, Who Still Says Tesla is "Paper Thin"?

April 24, 2024 Earnings Call: Will the Next Generation Model 2 Be Launched Ahead of Schedule?

January 25, 2024 Earnings Interpretation: [Tesla Without the AI Cloak: Unending Prices, Unstoppable Losses](https://longportapp.cn/zh-CN/topics/11332623?channel=t11332623&invite-code=4NOXYT&app_id=longbridge&utm_source=longbridge_app_share)》

January 25, 2024 earnings call: Tesla Q4 Summary: 2024 Sales Will Miss "50%", But Expenses Will Continue to Rise》

December 1, 2023 hot review: Tesla Cybertruck: Pricing Too High, Economic Efficiency Too Low

October 19, 2023 earnings interpretation: Bubble Bursting Moment! Tesla, Reality is Harsh

October 19, 2023 earnings call: CT Slow Climb, Mexico Slow Factory Construction, Musk Has Bankruptcy "Phobia"

October 12, 2023 in-depth: FSD Smart Driving: Unable to Support Tesla's Next Valuation Miracle

September 22, 2023 in-depth: Lion King Meets Pack of Wolves, Can Tesla "Watch the Home"?September 19, 2023 Deep Dive “Tesla: How Far Is Musk's 'Trillion Empire Dream'?”

September 1, 2023 Hot Comment “New Model 3 Goes on Sale, Prices Rise Instead of Falling?”

July 20, 2023 Financial Report Interpretation “Trillion Tesla, Only True Fans Dare to Take It On”

July 20, 2023 Financial Report Conference Call “Tesla Minutes: Gross Margin Lost, Tesla May Continue to Cut Prices”

April 20, 2023 Financial Report Interpretation “Tesla: A Year of Big Promises, A Year of Small Deliveries, 'Long-term Companionship' Is Too Difficult”

April 20, 2023 Financial Report Conference Call “Tesla: Confidently Selling Cars at Zero Profit, Harvesting with Autonomous Driving”

January 26, 2023 Financial Report Interpretation “Tesla's Story Reshaped, The Moment to Test Faith Has Arrived!”