Instant Reaction: Tesla Earnings Miss Despite A Sales Surge

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1:02Bloomberg Audio Studios. Podcasts. Radio. News. This is a breaking news update from Bloomberg. Instant reaction and analysis from our 3 ,000 journalists and analysts around the world. Tesla earnings. The company posted third quarter profit that fell short of Wall Street's expectations. Despite record EV sales, it's a sign of the pressure that automakers are facing from shifting federal policies and rising costs. I want to bring in Ed Ludlow. He's the co-host of Bloomberg Tech on Bloomberg Television. He joins us from our San Francisco Bureau. Really interesting number when it comes to cash flow, free cash flow, Ed.

1:43Third quarter free cash flow,$3.99 billion. The estimate was for$1.25 billion. Why? How? Funny, I just posted in the IB on the Bloomberg terminal, hey, team, free cash flow so much higher. Why? Question mark. Answer from editors and other reporters. Energy storage? Question mark. That's to say, don't know. I mean, I've read so much of the deck already. Well, I want to help us out, Ed, because Thomas Thornton over at Hedge Fund Telemetry sending an IB to me during the simulcast. He said, inventory cleared out with EV subsidies ending. That's why cash flow was strong. Was this about inventories?

2:25Remember that the number from the third quarter, which was just shy of 500 ,000 vehicles, was heavily influenced by the expiry of the federal tax credit. on consumer EVs. In part, Tesla did additional promotional activity around that. So, you know, elsewhere on the bottom line, you know, if it's EPS or other metrics, they've missed on part because of those factors, right? You know, the discounting and other promotion they did. Inventory will be a factor. We've been tracking a buildup in inventory that Tesla had going into that period. But remember, they also saw an inventory build up ahead of the cheaper Model Y, Model 3 standard coming out with some consumers holding off because they knew that some kind of product was going to be unveiled in the month of October.

3:15But what I would say is that when we talk about the bottom line broadly, Tesla is listing a very long laundry list of impacts here. Yes. Ranging from tariffs, fiscal policy, R &D costs, the mix of vehicles they sell. But this isn't severe by any means, right? You know, this is the market selling news, basically. Well, what's interesting is both you and our Dana Hall on our live Tesla blog pointing that out. You know, it is difficult to measure the impacts of shifting global trade and fiscal policies on the automotive and energy supply chains, our cost structure, demand for durable goods and related services.

3:50As you say, they are reminding everyone that the business, I mean, there's a lot of factories, factors that are going to involve, that are going to impact their business. I feel like they are managing and maybe with some negative tone going forward. Yeah. I mean, one sort of specific example is that when you introduce a new product and you have to install the assembly line for that product. There are downtime and installation costs associated with that. It impacts how you produce other products. That shows up in financials. In this case, they haven't really given us a big picture outlook for their growth for this calendar year, nor next year, or going forward.

4:33They have told us that they are doing things like ramping the standard models of the three and the Y, and now they've installed the assembly line for Optimus, the humanoid robot. So like I'm talking about in factories in Texas and I'm assuming elsewhere down the line, they're like, OK, we've got to find space to build an assembly line here for a humanoid robot. And that will have an impact. But the way I've summarized it in the blog is there are two paragraphs in the deck that are explaining to us the macro environment is changing and fiscal policy is changing. And Tester is trying to say we're kind of in transition here.

5:08Bear with us. what what where where are those i want to know what those like what is the transition that's happening right now this is a macro and this is the context to add is this is somebody who was very close to the president and was very close to yeah you know during the election before the election and then after the election for a good time as well well the the direct answer is that tariffs have had an impact they've listed it in the negative column on profit so that's across both the consumer EV business and the energy storage business. As it relates to that free cash flow question, they do say in the free cash flow section of the deck that not only did they have record deliveries in that quarter gone, energy products were more higher volume.

5:54But policy is not really supporting that right now, at least not in the United States, right? So I think for them, it's just this idea that the direction of travel we were moving towards for sustainable energy, you know, transition from gas engine or combustion engine to EV. It's not there right now. And what they explain in those two paragraphs is they're trying to invest into it. A lot of R &D costs for these future products are robots and robots. Is there an appetite for that? Is there, I mean, are they building a product that people want? I know that you, Steve Jobs famously was talking about building products that people didn't know that they wanted, but then ended up wanting them when they saw them.

6:33But do we need these humanoid robots? Is there a market for this? So Elon Musk and Tesla are once again behind their prior forecasts. If you guys remember, the original Optimus forecast was that by the end of this year, there would be meaningful volumes of them working within Tesla facilities. And that doesn't appear to be the case yet. The way that they are pitching it is a way that the rest of the humanoid robot industry pitches it, at least, which is that we have a labor deficit in some industries, heavy industry agriculture, and that economically at a macro level, Optimus is going to fill that void.

7:13So to answer your question, Tim, they would say that the demand is justified or evidenced by the lack of labor in certain workforces. Whether a consumer wants to go out and buy one for tens of thousands of dollars, that bit we just don't have the answer to yet. I want to bring in Ross Gerber. He's president and CEO of Gerber Kawasaki Wealth and Investment Management. Got more than$3 billion in assets under management. He joins us from Santa Monica, California. Ross, you now have about$80 million of Tesla shares, down from$100 million earlier this year. At your peak, how much Tesla stock did you own?

7:50I think we had about one and a half times more than we have today. So that's not that much more. No, we've cut our position by 60%. So that's that's fairly large. Are you are you buying or selling today or buying or selling right now? Neither, neither. You know, you know, Tesla is a hold for us. You know, the people who are holding the stock at our firm, our clients very much believe in Tesla and don't want to let go of their shares at all. And then, you know, the clients that don't want to own Tesla don't own Tesla anymore. But we're not recommending to buy Tesla or per se, more likely recommending to sell Tesla for investors up at these prices because you're getting such a premium valuation.

8:34But in general, we've just been holding the stock because we're kind of stuck with our position right now. What about you? Because we check in with you quarterly and you've really changed your position on the company in recent years and recent quarters and your position on Elon Musk, too. Are you a believer in the company right now? Yes and no. I still own Tesla stock as well, personally, not a lot. But, you know, I like to have some because I bought it at a dollar a share or$1.50. So it's like fun to have in my portfolio still. But that said, you know, I don't know what's going to happen with full self-driving.

9:11I just don't think it works. And I think vision only systems don't work. And I'm very sure of this now, even though I'm not an engineer. I can explain to you how humans drive. And I don't think Elon gets how humans work. I think he gets how machines work. And so I think that Tesla's in a pickle. If they can solve full self-driving, like I could get in my car right now and push a button and it drives me home, like I can get in a Waymo right now and it'll drive me home, no problem. Then I think Tesla has a reason to buy the stock because now they've got their products working and they can grow from there.

9:44But as far as waiting for robots and cabs to pay off, it doesn't matter if full self-driving doesn't work and full self-driving doesn't work. So nothing's going to get me excited about Tesla until it drives me home. All right. Good stuff. We're talking with Ross Gerber. Ed Ludlow, I know you're reading over stuff. Come on into the conversation with Ross. Yeah. I mean, you know, just going through the deck, the way that Tesla explains it is that they had lower FSD revenue recognition in this quarter because of the timing of previous generation releases of FSD in the same period a year ago. You know, I'm not a Tesla shareholder, as you guys know, but I do drive a Model Y.

10:24In fact, I use FSD every day for about 60 miles, 30 miles to work, 30 miles back. I'm not on version 14 yet. But Ross is speaking to the question which is always there. explain the jump or the steps to the end result, the end state. The end state is robo-taxi, right, if Tesla is to be believed. And right now, the street seems kind of split on whether we understand how we go from a software platform that consumers pay for as a one-off or a subscription package to a world where the vehicles built on a common software platform or iterations of that platform power a proprietary ride-hailing robotaxi service.

11:08You know, it's difficult to see the jump. And Ross can speak for himself. But just in the reporting, that's what we hear all the time. Yeah, I mean, you're 100 % right in that these are completely different businesses, right? Like selling cars that drive themselves is an Apple business model. And that's why I always love Tesla. When I first found Tesla, I was like, this is the Apple of cars, right? Like you build hardware and with great software and then you make money on services, right? And that's really where Tesla is making a ton of money right now is on services and energy storage, which are still great businesses for Tesla.

11:43But when you talk about building an Uber-like platform, this is an extremely difficult thing that it took Uber almost a decade or more to make money doing. And Uber is very, very good at this now. And the only way they've been able to make money is by charging substantially more for the rides because Uber is not cheap anymore. And they had to subsidize rides for a decade just to build that business. So when you actually think about Tesla scaling, if there was no competition, that'd be one thing. But there's already several cab services I can take right now, whether it be Uber, Lyft or Waymo, that are all very good at what they do.

12:20So, you know, even if Tesla gets this to work, it's still a tough business. And the second thing I would just say, Ed, you use full self-driving a lot, obviously. You probably, if I ask, do you feel comfortable turning it on and going into the backseat of your car and letting you drive that full 30 miles home? I've never done that or attempted it. And I think, you know, I post quite a lot on X, my experiences. Like I say today, this is what happened. And, you know, I would never get in the back of the car and turn it on. I also would not put my little baby boy in it either. But the way that I've tried to track it is generation by generation.

13:00How is it improved on the route that I take every day? The one area where I struggled is with the toll boobs on the Golden Gate Bridge. You know, that can be precarious. And you can see my posts on that. On your point, in the AI graph of the shareholder deck, the way that Tesla explains it is that the latest version of FSD, they say has a substantial amount of the source code in the robo taxi version. And by putting it out into the real world, it gives them valuable real world data to help them improve a future robo taxi service. I don't weigh in on that one way or the other. I'm just saying that's Tesla's explanation on the link between the two, the consumer facing FSD and the same code base that will be used to power a future robo taxi service.

13:45Hey, Ed, Ross made the point that he doesn't believe vision only FSD or vision only self-driving works. Can you talk a little bit about that technology that Tesla uses versus the other companies, namely Waymo and Amazon's subsidiary as well? Yeah, so very simple. When we say vision-based system, the inputs for the vehicle are only cameras on a Tesla. The cameras capture optical data from around the vehicle and use the underlying algorithm to make an onboard decision, interpreting the world around them. The opposite academic view is that you need to paint a richer digital picture of the world using other forms of data gathered by LiDAR, radar, and in some cases, even going beyond that, there are varying degrees of LiDAR spinning or stationary or static.

14:44The economic argument that Tesla and Elon Musk have always made is that having a vehicle that has multiple sensors on it is not scalable. There is no end result where the vehicle could be affordable for a consumer or profitable for an operator of that system to run. The other robotaxi companies like Waymo or Zoox who do have multiple sensors and custom versions of them say that you have to have them for redundancy. So if one of those digital pictures fails, i.e. the vision one, the cameras fail, or the radar fails, you can still be safe because you have a rich enough digital picture of the world around you for the vehicle to make a decision based on the circumstances presented in front of it.

15:32All right. Ed Ledlow, we know you've got some stuff to do off of these earnings. So appreciate your input throughout the day today and certainly off of Tesla's earnings. Ross, thank you so much. Ross Gerber, President and Chief Executive Officer of Gerber Kawasaki Wealth and Investment Management. More than$3 billion in assets under management and they own about$80 million worth of Tesla shares.

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