The Reason Behind Tesla's Soaring Surge

Investors were more concerned about whether the budget-friendly Model 2 was still in production than the actual earnings data.

On April 5th, there was media speculation that Tesla had scrapped the development of the Model 2 in favor of focusing on Robotaxi. Although Musk quickly denied these rumors, calling them unfounded, market expectations had been lowered, with many guessing the Model 2 would at least be delayed.

But in the earnings report, Tesla gave a clear answer: not only are they going forward with production, but they're also picking up the pace. Musk said in the earnings call:

To quote Tesla's own words from the earnings report:

This means that before the new Model 2 is launched, Tesla will be in a transitional pain period between old and new models. Tesla's current product line has nearly reached its natural limit for cost reduction, and with fierce competition, Tesla's recent upgrades to existing models have been minor, with no blockbuster new models released in the short term.

Based on information currently available, production on the next-generation vehicle platform will significantly reduce vehicle production costs. The unit cost of the next-gen Model 3/Y will be 50% lower than the current models, with about one-third of the savings coming from the "Unboxed Assembly Process."

Musk also provided more details about the new vehicles, indicating that Tesla would combine parts of the existing production lines with the next-gen platform to produce new models. This means there's no need for new factories or production lines, allowing for more efficient rollouts of new models. If fully realized, future capacity could exceed 3 million vehicles. However, Musk said he would reveal more details on August 8th, so he refused all related questions.

The Q1 automotive gross margin (excluding carbon credits) was 15.6%, down just over a percentage point from the previous quarter's 16.6%, but clearly not the severe slide to the 13-14% the market was expecting.

So, the key takeaway here is how Tesla maintained vehicle prices and gross margins amidst frequent price cuts and a decrease in the sales mix of X/S/Cybertruck models.

The real reason that can explain this, and a story that AI faith funds love, is the increase in FSD revenue! Tesla didn't specify how much FSD revenue was recognized in Q1, but emphasized that due to the release of FSD V12 (supervised version), FSD-related revenue recognition increased a lot during the quarter. Look at the chart; this software fee-based revenue is recorded under automotive sales, so when such software income increases, it indirectly boosts vehicle revenue per car and gross margin.

Tesla's Q1 gross margin was indeed very good compared to the slashed market expectations, but the current over-performance in gross margin is mainly due to FSD. The real focus now should be on how sustainable and explosive FSD revenue will be. According to the latest information disclosed by the company, Tesla's accumulated miles of autonomous driving saw a nonlinear increase in March 2023 due to the release of the FSD Beta version and then returned to normal growth. In April 2024, after Tesla began offering a 30-day free trial, the mileage skyrocketed again.