First quarter earnings from Tesla (TSLA:NASDAQ) landed with a thud and came as a stark reminder of the company’s dual identity: a visionary leader in electric vehicles and autonomous technology, yet a business grappling with near-term financial turbulence, and a brand damage stink that could linger far longer.

While cheerleader-in-chief Elon Musk cranked up the hype, with ambitious plans for a Robotaxi service, humanoid robot Optimus, and cost leadership, Tesla’s top and bottom lines crumbled, marking its worst quarter since Q2 2022, and Wall Street didn’t sugarcoat it. 

Goldman Sachs, CFRA Research, RBC Capital, Cantor Fitzgerald, JPMorgan all took the red pen to forecasts and price targets, and even Wedbush Securities analyst Dan Ives, typically among Tesla and CEO Musk’s biggest backers, called the report a ‘fork in the road moment’ for the electric vehicle company in a post on social media platform X.

‘We knew Q1 Tesla deliveries would be soft, but these numbers were bad’, he wrote. ‘We are not going to look at these numbers with rose coloured glasses... they were a disaster on every metric. Refresh issues but brand crisis key.’

That brand crisis can be traced back to Musk’s position with the Department of Government Efficiency, or DOGE, an alleged effort to cut waste and fraud in the US government that has split opinions. Whatever investors might believe DOGE to be, it’s hard to argue that Musk hasn’t amplified criticism amid accusations of racism and antisemitism.

Tesla shares, at $274, are down 28% year-to-date, pushing the rolling 12-months PE (price to earnings) back into triple-digits.  

Musk now appears to have relented to investors’ wishes to put aside his political activities and refocus his attention on his primary company, if not completely, at least taking a large step in that direction.

Yet much damage has already been done. Musk’s antics have spawned a nationwide protest movement called Tesla Takedown, aimed at boycotting the company and driving down its stock price. And it appears to have been successful in persuading many progressive Tesla owners to either sell their vehicles or buy alternatives.

Even after the quarterly numbers were released, it emerged that Tesla’s European sales had fallen again, 28.1% year-on-year, in March.

There have also been unrelated violent attacks on Tesla stores and vehicles around the world, including several cases of arson and vandalism. President Trump has said suspects caught defacing Tesla vehicles would be charged with ‘domestic terrorism’.

UGLY EARNINGS

Tesla’s Q1 results unambiguously demonstrated the financial pressure the company is now under. Net income dropped to $409 million, while revenue fell 9% to $19.34 billion. Operating income tumbled 66% to $399 million, far below analysts’ $1.13 billion estimate, due to a 13% year-on-year decline in vehicle deliveries, weaker regulatory credit sales, and soaring operating expenses tied to AI development and other new initiatives.

To make matters worse, other income took a $234 million hit from Bitcoin-related losses.

The auto division’s struggles were especially acute. Auto gross margin, excluding regulatory tax credits, came in around 12.5%, down from 18.4% in Q1 2024 and marking the lowest since Q2 2012, when Tesla delivered 5,612 vehicles.

Meanwhile, tariffs on Chinese-sourced battery cells and rare-earth magnets for its Optimus robot programme add to expenses and complexity to its supply chain. Capital expenditures are projected to exceed $10 billion for the year.

The energy division provided a bright spot. Energy storage gross profit hit a record, driven by soaring demand for its Megapack utility-scale battery. 

Amid the gloom, Musk presented a typically bold vision of Tesla’s future built on AI, robotics, and self-driving cars, which he argues will propel Tesla to new financial heights. According to Musk, these products could make Tesla the most valuable company in the world one day, possibility worth more than the next five largest companies combined. That’s some chutzpah.

The CEO announced plans to launch a fully autonomous Robotaxi service in Austin by June 2025, with ambitions to deploy millions of vehicles by mid-2026, although similar promises in the past are still to arrive. This may hinge on Tesla’s AI software and its sensor-free approach, which Musk claims offers a cost advantage over lidar-dependent rivals like Alphabet’s (GOOG:NASDAQ) Waymo, a remote sensing technology that use active signals to detect and map objects much like radar but using laser pulses instead of radio waves.

Tesla also reported progress on Optimus, with plans to scale production to thousands of units by year-end. Musk also highlighted a manufacturing breakthrough, the ‘unboxed, production method for Cybercab, which promises low-cost, highly automated assembly. But the challenges are significant.

FORK IN THE ROAD

Investors are now left to weigh Musk’s long-term roadmap against the reality of dwindling margins, rising costs, and political headwinds. Which direction the company and its share price take may hinge on two questions: Can Musk execute his vision for autonomous vehicles and energy storage while navigating geopolitical risks and cost pressures? And will investors give the company enough time to do so?

There are some positives to be found if you look beneath the surface: Tesla’s energy business is thriving, its AI investments could redefine mobility, and its cost advantages in manufacturing remain unmatched. But the negatives are daunting. With operating expenses up 42% year-on-year, capital spending soaring, and quarterly net income at a five-year low, the company’s financial flexibility is thinning out.

Ultimately, for all the grand promises, Tesla remains for now principally a car maker. Much will depend on whether the company is able to arrest the decline in deliveries seen so far in 2025.

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