Musk warns of ‘rough’ patch after difficult quarter for Tesla while Google parent company gets AI boost

Tesla revenue fell 12% to $22.5bn, the sharpest decline in at least a decade

“Yeah, we probably could have a few rough quarters,” Mr 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.” (AP Photo/Matt Rourke, File)

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

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,” Mr 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 $22.5bn, 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 $300m. 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 Mr Musk’s political activities. Investors have largely been willing to look past the sales decline and toward Mr 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, Mr 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.

Mr 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.

“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,” Mr Musk said.

Polarisation 

Tesla’s brand has become increasingly polarising following Mr Musk’s support of Trump. During his brief role helping the administration, Mr 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 $439m in the second quarter. That’s down from $595m in the first quarter and $890m 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 Mr Musk have clashed since last quarter, when the Tesla CEO said he would be significantly reducing his time in Washington.

Meanwhile, Alphabet said demand for AI products boosted quarterly sales, and now requires an extreme increase in capital spending, heightening pressure on the company to justify the cost of keeping up in the AI race.

Alphabet's AI race

Google’s parent company said 2025 capital expenditures will be $85bn, or $10bn greater than an earlier forecast. Although Alphabet beat expectations for second-quarter revenue and profit, its stock initially sank in after-hours trading, then rebounded after CEO Sundar Pichai explained that the investments are necessary in order to keep up with customer needs. 

“Our AI infrastructure investments are crucial to meeting the growth in demand from cloud customers,” he said on a call Wednesday following the report.

As Microsoft startup OpenAI, Meta Platforms Inc and others continue to pour money into AI, Alphabet has little choice but to follow suit, analysts said. The race is particularly urgent for Google, with competitors building chatbots that may eventually appeal to consumers more than its flagship search product. 

The recent quarter was strong almost across the board for Alphabet. Sales, excluding partner payouts, climbed to $81.7bn, Alphabet said in a statement, topping analysts’ projections of $79.6bn on average, according to data compiled by Bloomberg.

• Bloomberg.