Elon Musk says Tesla will produce millions of robots and self-driving cars in the future that will propel the company’s market capitalization to stratospheric levels.
How he will fund that future is coming under sharper scrutiny. Musk is under pressure to wring better profitability from the core auto business to help pay for those moonshot bets.
Tesla’s better-than-expected third-quarter results on Wednesday offered a glimpse of how he might try to cross that chasm, including cost-cutting efforts that made Tesla vehicles cheaper to build and growth in the company’s highly profitable energy-storage business.
After years of breakneck growth, revenue from the car business has plateaued, and operating margins—while up in the third quarter—are down from a few years earlier. Now the Tesla chief executive officer says the company needs to increase spending for its next phase of growth, which includes rolling out a $30,000 self-driving Cybercab, AI-powered robots and more-affordable vehicles.
“The amount of work required to make an affordable car is insanely high,” Musk told analysts Wednesday.
The billionaire has urged investors to think of Tesla as an artificial-intelligence and robotics company, rather than a typical carmaker, and has said its efforts in these areas could eventually boost the electric-car maker’s market cap to $30 trillion.
Musk has stressed development of a robotaxi that could ferry passengers for paying rides, and aims to start selling a humanoid robot, called Optimus, in 2026.
Investors have largely bought into this vision, with Tesla’s $681 billion market cap more akin to Silicon Valley innovators than metal-bending manufacturers of automobiles.
Still, these endeavors are costly and come as Tesla’s profit margins are pressured by lower vehicle deliveries, an aging model lineup and the need to lean more heavily on price cuts and other promotions to keep buyers interested.
Musk said Wednesday that the company was aiming for a 20% to 30% increase in deliveries next year.
This year alone, Tesla plans to spend about $10 billion on AI-related expenses. That figure is more than double the $4.36 billion in free cash flow Tesla generated for all of 2023.
In many ways, Tesla is confronting an age-old problem in the car business—one that has bedeviled automotive CEOs before.
Musk wants to build Tesla into a tech company with hefty investment in new ventures in part by leaning on Tesla’s automaking operations, a historically low-margin business that is highly competitive and sensitive to swings in the economy.
It is a tricky balancing act, made more difficult as the market’s enthusiasm for electric vehicles cools and rivals unleash new battery-powered models, aiming to dethrone Tesla as the world’s top EV seller.
The first nine months of 2024 have already been a challenge for the electric-car pioneer as it cranks up spending on projects that could still be years away from generating a steady return.
Tesla’s operating margin was 10.8% in the third quarter, the highest level this year but still below the level of prior years before the company began cutting prices on its vehicles.
General Motors reported Tuesday that it had an operating margin of 7.5% in the third quarter. It is on track to report record operating profit for the full year, as a result of strong demand for gasoline vehicles.
Wall Street is eager to learn how Musk plans to pay for the multibillion-dollar investments in AI research necessary to fuel Tesla’s transformation. The October unveiling of the Cybercab was met with investor disappointment, in part because Musk didn’t delve into details about the technology behind the self-driving taxi or how he plans to turn it into a viable business.
“Without much indication of progress on either technology or business models, we are back to focusing on operations and lingering concerns about governance and funding,” wrote Jefferies analyst Philippe Houchois in a note ahead of Wednesday’s report.
Musk said Wednesday that the company would roll out an autonomous ride-hailing service in Texas and California, subject to regulatory approval.
Tesla has other advantages over its rivals, including more-advanced software development and a record of innovations that cut engineering and factory costs. Musk also has a reputation for defying the odds, such as when he launched the Model 3 sedan—even though, as he has said, the effort almost broke the company.
Tesla might have a better shot than other carmakers to develop AI and self-driving vehicles, said Shay Natarajan, a partner at the private-equity fund Mobility Impact Partners, which doesn’t own a stake in Tesla. “But I think it’s a hard thing for an auto company to do,” she added. “It’s easier for a software company.”
Tesla’s AI pursuit involves multibillion-dollar investments over an uncertain timeline. The technical hurdles to putting driverless cars on public roads has challenged such deep-pocketed technology giants as Alphabet’s Waymo, which has been working on the technology since 2009.
Tesla is rushing to drive costs down, including with a reduction of more than 10% of its global workforce this past spring and throttling back some projects, including the Roadster sports car.
Musk has said the company is on track to launch a more-affordable model next year, a move that many investors view as critical to keeping Tesla competitive, especially with the rise of cheap, Chinese-made EVs.
But Musk on Wednesday appeared to dismiss the idea of selling a long-anticipated $25,000 car. He said the Cybercab, which is designed largely for ride-hailing, with no steering wheel or pedals, would fill that role.
“Tesla is focused on building the future of energy, transport, robots and AI,” Musk said. “If we execute on our objectives, my prediction is Tesla will become the most valuable company in the world, and probably by a long shot.”
Write to Sean McLain at sean.mclain@wsj.com
