Tesla banks on AI and full self-driving tech amid declining profits and weakening motor business

Texas-based company reports a 71% drop in last quarter's net profit

Tesla's automotive business revenue dropped more than 8 per cent to almost $19.8 billion in the December quarter. AFP

Tesla emphasised its confidence in the future of artificial intelligence and full self-driving (FSD) technology, despite reporting a more than 70 per cent drop in net profit last quarter and revenue falling short of analysts' expectations.

The company on Wednesday said it boosted its AI training by more than 400 per cent in 2024, using this expanded computing power to significantly improve its FSD capabilities this year. It expects these advancements to pave the way for unsupervised FSD and the launch of robotaxi services by 2025-2026.

“2025 will be a seminal year in Tesla’s history as FSD [supervised] continues to rapidly improve with the aim of ultimately exceeding human levels of safety. This will eventually unlock an unsupervised FSD option for our customers,” Tesla said.

Tesla’s billionaire chief executive Elon Musk has long promised fully autonomous robotaxis, and 2025 is now the make-or-break year, analysts said.

The Texas-based company said it plans to begin launching robotaxi services in parts of the US this year, a move towards competing with Alphabet’s Waymo and General Motors’ Cruise. The Cybercab, Tesla’s robotaxi, is expected to enter volume production by next year.

Currently available as a beta version, FSD includes features such as automatic lane changes, navigation on motorways and traffic light recognition. However, the system still requires human supervision and is not yet considered to be fully autonomous.

In October, Tesla captivated fans by showcasing a prototype of its Cybercab, fuelling anticipation for its autonomous vehicle ambitions. However, the company has yet to manufacture fully self-driving robotaxis. Tesla also sells FSD Supervised, an advanced driver-assistance system that enhances automation but still requires active driver supervision.

Tesla plans to launch unsupervised FSD as a paid service in Austin in June, Mr Musk said during the investors' call. He added the company will “look to release unsupervised FSD in many regions” of the US by the end of 2025.

After this announcement, Tesla’s shares jumped 4.15 per cent to trade at $405.25 in after-hours trading. It closed 2.26 per cent down at $389.10 at market close giving the company a capitalisation of $1.22 trillion.

Why discounts are haunting Tesla’s profits?

The company posted a net profit attributable to common stockholders of more than $2.3 billion during the October-December, a 71 per cent drop from the same period in 2023.

The Texas-based company delivered 495,570 vehicles in the last quarter, an annual increase of about 2.3 per cent. However, its annual deliveries dropped for the first time last year as it delivered about 1.79 million vehicles, short of the 1.8 million vehicles it delivered in 2023.

Total revenue during the December quarter jumped 2 per cent yearly to more than $25.7 billion, missing analysts’ expectations of $27.2 billion. The company attributed the decline to lower average selling prices across its Model 3, Y, S and X line-ups.

The company’s automotive business revenue dropped more than 8 per cent to almost $19.8 billion while its energy and storage revenue jumped 113 per cent to $3 billion.

The company's operating income decreased by 23 per cent yearly to more than $1.5 billion in the last quarter while operating expenses surged 9 per cent to nearly $2.5 billion.

Tesla’s earnings report has come amid a sharp surge in its stock price, driven by market optimism after Donald Trump’s election as the US President. Billionaire businessman Mr Musk, a prominent supporter of Mr Trump’s campaign, now leads the administration’s newly formed government efficiency advisory board.

Investors have fuelled Tesla’s stock rally since Mr Trump’s November victory, anticipating that Mr Musk’s close ties to the administration could result in business-friendly policies and reduced regulatory scrutiny.

Despite Trump's ties, why are analysts unimpressed with Tesla?

Mr Musk has predicted that Tesla’s automotive business will return to growth this year, but current market conditions offer little evidence to support that optimism, analysts said.

Electric vehicle demand remains sluggish across the industry, while enthusiasm for Tesla appears to be fading – driven by a lack of innovations in recent years and a significant decline in brand perception, said Thomas Monteiro, senior analyst at Investing.com.

“Musk's successful political bet brought him the most valuable commodity Tesla investors could have wanted right now, which is time,” Mr Monteiro told The National.

“With the legacy business clearly struggling in both the US and Europe, the promise of more – and revolutionary – developments in the autonomous driving business and production fronts, on the back of deregulation, are likely [to be] the only things able to keep the stock afloat after the 60 per cent rally since the election.”

Focus on improving affordability and returning to growth

In its shareholder deck on Wednesday, Tesla said “affordability remains top of mind for customers” and it is reviewing every aspect of its “cost of goods sold per vehicle to help alleviate this concern”.

In the previous quarter, Tesla introduced various incentives, including discounts on inventory vehicles and exclusive offers for North American buyers who bought through a referral. Meanwhile, in China, the company reduced prices on its best-selling Model Y SUVs before the launch of its updated version, the Model Y Juniper.

Tesla said it expects the vehicle business to return to growth in 2025. However, the rate of growth will depend on a variety of factors, including the rate of acceleration of its autonomy efforts, production at its factories and the broader macroeconomic environment, the company said.