Tesla will report Q1 results this Wednesday after the market closes. Revenues are expected to come in at $22.05bn, and profits are expected to be $1.21bn. Revenues and profits are expected to be lower than Q4 2025, however, the focus could be on gross margin and free cash flow.
Is Tesla spending too much on AI?
Gross margin is expected to come in at 17.5%, down from 20% in Q4. Free cash flow is also expected to swing into negative territory at -$1.57bn, down from $1.4bn in the previous quarter. These two metrics are worth watching because they may highlight margin pressure due to rising AI spend. If the market is not convinced that the company can transform its AI investments into meaningful progress for the bottom line, then sentiment towards the stock could struggle.
As always with Tesla, this earnings report is as much about sentiment and belief in Elon Musk’s vision as it is about fundamentals. Its AI prowess and future plans have powered the stock to trade at 35x the valuation of Mercedez Benz and 52x the value of Volkswagen. Investors may have difficulty with valuing the company if margins are compressed in Q1. Disappointing profit margins could knock sentiment towards the stock, which has risen by 67% in the past year, as it would leave investors pondering when Tesla’s AI investments will pay off.
Tesla needs to prove that AI spending is worth it
Is Tesla a car company or an AI powerhouse? The truth is it is both. It still produces cars, but it has a problem when it comes to selling its famous EVs. Sales are failing to meet expectations. 408,000 Tesla’s were built in Q1, but only 358,000 were sold, which means that nearly 50,000 vehicles are unsold. Rising inventory levels have hindered the stock price, which has not joined in the broader rally for US stocks in recent weeks.
Don’t be fooled by flattering YoY comparisons
While there are some questions around Tesla’s long term business strategy, the Q1 numbers could look good compared to a year ago, and YoY growth could rise by 13% for revenue, and by more than 30% for earnings per share. Q1 2025 was a torrid quarter for the company, model Y production shut down which cratered revenues. Thus, the YoY comparison may not give the full picture.
Driverless tech in focus
The market will want to get an update on the autonomy roadmap, which is a key plank in Tesla’s future growth plan. Some analysts believe there could be an upside surprise for margins due to Tesla’s subscription-only model for self-driving technology. However, if this fails to attract customers it could blow a hole in Musk’s vision for a driverless future.
Humanoid robots and Robotaxis
Robotaxis are also seen as the big revenue driver for Tesla in the future, and investors will want to hear an update about regulations and new cities where they can operate. Musk is also likely to comment on Optimus, or the Tesla bot, which is a humanoid robot, currently in the development phase, which is designed to automate repetitive, boring or dangerous tasks.
Musk is a huge fan of Optimus and believes that every household will have one of these human-like robots in the future. Investors will want to know when Optimus will potentially be brought to market, and how far along they are in the development process. Space X’s newly announced deal to either buy the startup coding company Cursor for $60bn later this year, or spend $10bn on the work the two companies have been doing together, could also be scrutinized later this evening, especially if there are concerns about capex spend and negative free cash flow.
Can Elon persuade investors to continue backing his vision?
A Tesla earnings call is often an insight into the mind and imagination of Elon Musk. However, for the stock price to strengthen and rise above the 200-day sma, Musk needs to put his thoughts into dates for delivery and future revenue predictions, otherwise investors could lose patience.
It has been a rough ride for Tesla’s share price over recent earnings reports, and the stock price has fallen after two of the most recent three earnings releases. However, over a longer period, the stock price tends to rally 8% on the day after earnings are released. Elon has a lot of persuading to do if the same is to happen after this report.
Chart 1: Tesla’s share price has struggled in the last 3 months
Source: XTB
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