Musk Warns of ‘Rough’ Patch After Tesla’s Difficult Quarter

(Bloomberg) — Elon Musk warned of difficult times ahead for Tesla Inc. after one the automaker’s worst quarters in over a decade.

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Tesla will be a transition period for the next year or more, losing electric vehicle incentives in the US and needing time to roll out autonomous vehicles, the chief executive officer said.

“Yeah, we probably could have a few rough quarters,” Musk said. “But once you get to autonomy at scale in the second half of next year, certainly by the end of next year, I would be surprised if Tesla’s economics are not very compelling.”

Tesla shares fell as he spoke, sliding as much as 5.3% in postmarket trading Wednesday in New York. The stock already had tumbled 18% this year through the close, even after rebounding from lows in March and April.

The company reported adjusted earnings of 40 cents a share, missing Wall Street’s already lowered estimates. Revenue fell 12% to $22.5 billion, the sharpest decline in at least a decade. Vehicle deliveries slumped and the average selling price of its cars dropped.

Tesla also reported falling sales from energy generation and storage and said costs from tariffs rose around $300 million. The impact from the levies is expected to grow in the coming quarters.

Tesla’s traditional carmaking business is struggling in the face of rising competition and continued fallout from Musk’s political activities. Investors have largely been willing to look past the sales decline and toward Musk’s promises of a future built around artificial intelligence, robots and self-driving technology, but the comments show there will be more turbulence before there’s any payoff in these investments.

“There will be some teething pains” as the company invests in robotics and autonomous driving, Musk said.

On the conference call, executives spent relatively little time discussing the EV business, spending portions instead talking about a planned expansion of the newly launched robotaxi service, its new Tesla diner, and whether the company could invest in the CEO’s new AI startup.

Musk also reiterated his desire for a greater ownership stake in Tesla — suggesting it should grow in order to prevent his ouster from an activist investor. His multibillion-dollar Tesla payout was gutted by a Delaware judge late last year, and the company is appealing the ruling and has moved its incorporation to Texas.

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“I think my control over Tesla should be enough to ensure that it goes in a good direction, but not so much control that I can’t be thrown out if I go crazy,” Musk said.

Polarization

Tesla’s brand has become increasingly polarizing following Musk’s support of Trump. During his brief role helping the administration, Musk’s attempts to slash government spending generated criticism from many of Tesla’s traditionally left-leaning consumers, while some investors worried the project was a distraction. A number of analysts have adjusted their expectations downward in recent weeks.

Chief Financial Officer Vaibhav Taneja warned that the recently passed US tax-and-spending bill will hurt demand. Revenue from regulatory credits — an area that has become a significant revenue stream for the company — fell more than 26% to $439 million in the second quarter. That’s down from $595 million in the first quarter and $890 million in the same period a year earlier.

That income is expected to drop sharply as the Trump administration eliminates penalties for automakers that fail to meet federal fuel economy standards. Trump and Musk have clashed since last quarter, when the Tesla CEO said he would be significantly reducing his time in Washington.

Affordable Vehicle

Tesla also reported the “first builds of a more affordable model in June.” The company had previously said production of its long-awaited more-affordable model would begin in the first half of this year. The model, which Musk said would resemble a Model Y, is seen as a key factor to helping reverse the declining sales.

On the company’s robotaxi, Tesla said it aims to further improve and expand the service, which began this summer in Austin. Future growth could be in California, Nevada, Arizona and Florida, he said.

Executives estimated the network could reach “half of the population of the US by the end of the year,” but the company will still need certain regulatory approvals, including for the Bay Area, where Musk said the company would expand to next.

Gene Munster, managing partner at Deepwater Asset Management, said Tesla offered positive comments on areas such as its driver-assistance program and robotaxi — but noted investors were looking for more near-term specifics on autonomy.

“All eyes are on how Austin is going to play out and we didn’t hear much,” Munster said. He said Tesla offered little on key robotaxi milestones, such as how the company will scale its fleet.

“Investors were hoping to hear something and they didn’t hear it,” he said.

–With assistance from Esha Dey.

Musk Warns of ‘Rough’ Patch After Tesla’s Difficult Quarter

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