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Tesla's Challenges Deepen: Q2 Earnings Decline and Future Outlook

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Tesla's Q2 Earnings Slump

Tesla's (TSLA.O) woes deepened on Wednesday as the company reported a second-quarter earnings report showing a double-digit decline in adjusted net profit. This comes after a quarter that saw its biggest sales drop ever. Tesla's adjusted net profit for Q2 fell to $1.4 billion, a decrease of $419 million or 23% compared to the same period last year. This decline far outstrips the 13.5% decrease in sales. By a more strict accounting, net profit fell 16% to $1.2 billion. Automotive sales revenue, the core of the company's business, fell 16% year-over-year from April to June. Overall revenue also declined by 12%, both falling short of Wall Street expectations, signaling that Tesla failed to maintain car prices as analysts predicted. The average revenue per car also fell by $500 in the second quarter, dropping to $42,231. Sales of the best-selling Model Y and Model 3 saw a 12% year-over-year decline, while sales of higher-priced models (including Cybertruck) plummeted by 52%. Following the earnings release, Tesla (TSLA) shares fell about 2% in after-hours trading.

Chinese Competition and Musk's Influence

Weak sales are widely believed to be attributable to both the public fallout from CEO Elon Musk's political stances and increased competition in the electric vehicle market, particularly from Chinese automakers. Even in a market with overall growth in electric vehicle sales, Tesla's performance is declining. The company is on the verge of being overtaken by Chinese automaker BYD, which has not even entered the US market yet. The continued decline over the past 18 months marks a stunning reversal for Tesla. Prior to 2024, the company only saw one quarter of year-over-year sales decline, and that was during the worst period of the COVID-19 pandemic when showrooms and factories were forced to close.

Future Challenges

Tesla still faces a number of significant challenges. The $7,500 tax credit offered by the US government to electric vehicle buyers will expire in October, potentially forcing Tesla to further reduce prices to maintain sales, thereby squeezing profit margins. The US market accounts for nearly half of Tesla's total sales. Perhaps a more serious financial problem is the demise of the regulatory credit market. Since 2019, Tesla has generated $11 billion in revenue by selling carbon emission credits. Traditional gasoline-powered automakers were buying Tesla's carbon credits to offset their emissions gap in order to avoid paying fines. But the Republican tax and spending bill passed earlier this month eliminated penalties for automakers violating emissions regulations. Tesla would have incurred losses in the first quarter of this year without this portion of carbon credit revenue. In the past second quarter, its net profit was higher than this income, but the risk has already emerged.

Musk's Focus on Autonomous Driving

On the investor call following the earnings announcement, Musk did not directly address the significant decline in sales and revenue, only briefly mentioning the financial difficulties facing the company. "Yes, we may have a couple of tough quarters...I'm not saying that's definitely the case, but it's certainly a possibility." He did not specify whether these "tough quarters" would see losses, but said the company's financial situation would become "extremely compelling" by mid-next year at the latest. Musk focused on the company's future robotaxi service, saying the service will launch by the end of this year in areas where half of the US population lives, and predicted that the humanoid robot Optimus, which is still under development, will enter production. Musk said: "Autonomous driving is the core story, it amplifies the company's value to extremely high levels." In fact, as early as 2019, Musk announced that Tesla would launch a robotaxi service within a year, but he never fulfilled his promise. The service finally launched in June of this year, but it was limited to parts of Austin, Texas, and was only available to Tesla fans, and there is still a company employee next to the "self-driving" seat. Tesla said in a statement on Wednesday: "Although the service currently covers a limited range, we believe that our autonomous driving strategy...can continuously enhance safety, rapidly expand the network, and improve profitability." However, it may take many years before the robotaxi service generates significant profits for the company. At the same time, Waymo, the self-driving division of Alphabet, is far ahead of Tesla, currently completing more than 250,000 paid passenger services per week in four locations: Austin, San Francisco, Los Angeles, and Phoenix.

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