Tesla’s profit margins drop 45% amid heavy AI spending and EV discounts

Tesla’s profit margins declined significantly in Q2 2024, falling short of investors’ projections. The company’s second-quarter earnings report revealed a steep drop of more than 40% year-on-year. Profits plummeted to $1.48 billion compared to $2.70 billion in Q2 2023.

Q2 2024 marks Tesla’s lowest profit margin in five years and a 42% drop from Q2 2022. The electric vehicle manufacturer’s operating margin was down to 14.6%, with less than 300,000 deliveries during that period. The quarterly income equated to 52 cents a share, disappointing analysts who had hoped for 61 cents a share for the company in Q2. 

Source: Statista

AI spending and EV discounts behind Tesla’s spiral

EV discounts and hefty AI spending are hammering Tesla’s profit margin. Throughout 2023 and much of 2024, The electric vehicle maker 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 noted that if somebody does not believe his company will solve autonomy, they should not be an investor.

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.”

Shareholders urge the company’s board to invest in xAI

Tesla has seen a great shipment decline as the EV market matures. Its growing priority for AI investments has also taken up much of its operating expenses, resulting in lower profit margins. 

Recently, 1,400 Tesla shareholders asked its board to invest $5 billion in xAI, the artificial intelligence firm founded by Elon Musk. This outreach to Tesla’s executives was made just a few weeks after Musk initiated a poll on his social media platform, X, inquiring whether the company should put $5 billion into xAI, provided that a group of reputable external investors backs it. 

Following the overwhelming majority of more than 958,000 responses, including many from accounts that may not have any connection to Tesla, Musk declared his intention to “discuss” this investment proposal with the board.

Other issues contribute to declining profits  

The Texas-based company reported a 25% profit margin in Q2 2022, with roughly 400,000 deliveries. From then on, Tesla’s profit margin plummeted to below 20% throughout 2023.

During Q1 2024, the falling profit 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 attributed to shipment disruptions caused by Houthi attacks on shipping in the Red Sea. 

The full effects of the attacks came when the Texas manufacturer closed its factory just outside Berlin towards the end of January due to delayed supply. During that period, one of its factories in Germany was also struck by an environmentalist arson attack.

American multinational automotive shares were also greatly affected, with the EV supplier reporting a nearly 12% share decline on July 24. 

The coming quarters will be critical in determining how effectively Tesla can manage these competing pressures and position itself for sustainable growth in the electric vehicle market.