On Oct. 10, investors will be eyeing a potentially game-changing announcement from one of the world’s leading artificial intelligence (AI) pioneers.
For the more than 68 million beneficiaries currently receiving a Social Security check each month, today is kind of a big a deal. In less than four hours, the September inflation report will be released by the U.S. Bureau of Labor Statistics and the Social Security Administration (SSA) will have the final puzzle piece necessary to calculate the 2025 cost-of-living adjustment (COLA).
Social Security’s COLA is the tool the SSA uses to increase benefits most years to ensure that beneficiaries don’t lose buying power. This will likely mark the fourth consecutive year of an above-average “raise.”
But Oct. 10 is about more than just Social Security’s 2025 COLA reveal.
Seemingly nothing has influenced Wall Street’s major stock indexes more this year than the rise of artificial intelligence (AI). The capacity for AI-driven software and systems to become more proficient over time, and perhaps even learn new skills without the need for human intervention, gives this technology utility in virtually all sectors and industries.
While Nvidia‘s quarterly operating results have, predominantly, been the star of the AI revolution, the main event for Wall Street today, Oct. 10, is electric-vehicle (EV) manufacturer Tesla (TSLA -1.41%) hosting its robotaxi event.
Tesla’s Model 3 is its top-selling sedan. Image source: Tesla.
Tesla is attempting to drive innovation, and its valuation
Tesla is no stranger to breaking down barriers. It’s the first automaker in well over a half-century to have successfully built itself from the ground up to mass production. Elon Musk’s company has the capacity in place to easily top 2 million EVs produced annually, should demand call for it.
It’s also the only pure-play EV maker that’s been consistently profitable. If Tesla generates a generally accepted accounting principles (GAAP) profit this year, it’ll mark its fifth consecutive year in the black. Most EV makers are looking for their first quarter of profitability, let alone recurring profits — and this includes the EV divisions of Detroit’s legacy automakers.
But Wall Street is often forward-looking; and all eyes today are on Tesla’s robotaxi ambitions.
Autonomous ride-hailing is a nascent opportunity with otherworldly potential. Ark Invest CEO and Chief Investment Officer Cathie Wood foresees Tesla generating the bulk of its sales and earnings before interest, taxes, depreciation, and amortization (EBITDA) from robotaxis relatively soon.
Based on Ark’s Monte Carlo analysis, Tesla is forecast to generate $400 billion in EBITDA from $1.2 trillion in sales by 2027. Approximately 63% of net revenue and 86% of EBITDA will come from robotaxis, per Wood’s Ark Invest.
Tesla’s robotaxi event, which was previously scheduled for Aug. 8, but was delayed to address a design change, will kick off at 7:00 p.m, PT, and focus on the autonomous capabilities of Tesla’s new operating segment. Considering the repeated claim from Musk that Tesla collects copious of vehicle data, professional and everyday investors will be focused on safety data, as well as estimates from Musk as to how much robotaxis will add to his company’s top- and bottom-line.
With robotaxis expected to provide a considerably higher operating margin than Tesla can generate from simply producing and selling EVs, this event has major long-term profitability implications, and has played a big role in the rally we’ve witnessed from Tesla’s stock in recent months.
Image source: Getty Images.
Elon Musk has a habit of overpromising and underdelivering
While there’s a lot of hype for Tesla’s robotaxi event (and with good reason), it’s important to keep in context that CEO Elon Musk has a terrible habit of overpromising and underdelivering when it comes to game-changing innovations or advancements for his company.
For instance, the famed all-electric Cybertruck was unveiled in 2019 and, per Musk’s words during his company’s fourth-quarter conference call in 2021, was slated to go into production in 2022. Ultimately, the Cybertruck launch was delayed until late 2023, with early sales largely underwhelming Wall Street.
Delays were the name of the game with Tesla’s gigafactories in Austin, Texas, and Berlin-Brandenburg, Germany, too. Both gigafactories were expected to open in 2021, but didn’t ultimately begin production until April 2022 and March 2022, respectively. To add insult to injury, Tesla isn’t operating at full production capacity given recent demand weakness for EVs.
But perhaps the most-damning overpromise for Musk has been his insistence that Tesla is “one year away” from full autonomy — i.e. Level 5 full self-driving (FSD). Musk has been making this claim of being a year away from full autonomy for a decade. However, Tesla has yet to advance beyond Level 2 FSD, which requires drivers to be attentive and ready to take over. Meanwhile, Mercedes-Benz has been given Level 3 autonomy approval in select states and is working on Level 4 autonomous-driving solutions.
In October 2019, we also witnessed Musk proclaim, “Next year, for sure, we will have over a million robotaxis on the road.” Five years later, there are exactly zero Tesla robotaxis on public roads.
Musk has made a laundry list of far-reaching promises regarding innovations to come at Tesla, many of which have been baked into the outsized valuation of his company’s stock. But when push comes to shove, very few of these prognostications have come to fruition — and the vast majority that did were on a delayed timeline.
In other words, actions are going to be far more important than words when Elon Musk drives home Tesla’s robotaxi ambitions later today.
But wait, there’s more
However, Musk’s propensity for overpromising and underdelivering isn’t the only issue Tesla is contending with at the moment.
As competition has meaningfully picked up in the EV space, North America’s leading EV maker has become more aggressive with its pricing. Since the start of 2023, Tesla has notably reduced the selling price for its four main production models (3, S, X, and Y) on more than a half-dozen occasions. These price cuts are a direct reaction to weaker consumer demand and are designed to keep inventory levels down.
Unfortunately, Tesla’s meaningful price cuts haven’t been able to keep its global inventory levels from climbing. As of the end of March 2022, the company had just three days of global vehicle inventory (essentially new vehicle inventory at the end of a quarter divided by the relevant quarter’s deliveries). As of June 2024, days of supply had jumped to 18.
On top of rising inventory, Tesla’s operating margin has taken a beating as the company has aggressively cut the selling price of its EVs. Its operating margin has fallen from 17.2% in the September-ended quarter of 2022 to a pedestrian 6.3%, as of the June-ended quarter of 2024.
Among the many reasons Tesla commands a massive valuation premium over legacy auto stocks is the belief that it’ll be substantially more profitable on a per-vehicle basis. A 6.3% operating margin is historically weaker than what legacy automakers deliver.
Tesla’s profit is also increasingly coming from unsustainable sources. In the second quarter, roughly two-thirds of the company’s pre-tax income can be traced to regulatory tax credits sold to other automakers and interest income earned on its cash. Put another way, Tesla is generating far less in income from its actual operations than investors might realize. It makes the company’s already outsized valuation even more egregious.
Suffice it to say, Tesla has no room for error with its robotaxi event or launch timeline.