Musk Robotaxi Pump Tries to Mask Reuters' Scoop on Tesla's $25K Model Being Scrapped

Tesla's stock rose by 3.8% in the after hours; This move by Musk appears like extreme desperation, and if true, Tesla has no new models for a while

On Friday, 90 minutes into the trading session, Reuters published a big scoop (with 4 sources) on Tesla abandoning the development of its $25,000 low-cost EV, the only new car Tesla has in its product pipeline.

This low-cost EV (referred to as the Model 2) was a highly anticipated new car because Tesla said it would have 50% lower production costs and sell roughly 500,000 units per year. It implied an incremental $2.7 billion of gross profit to Tesla’s 2023 Automotive gross profit of $16 billion—a potential 17% increase (see Figure 3).

In light of Tesla’s 23% YoY drop in non-GAAP net profit last year from 29% price cuts to keep its old model line-up growing, the launch timing of the Model 2 was one of the most voted questions by investors for the Q4 2023 earnings call in January on Say—a service that consolidates investor questions to management on quarterly earnings calls.

In light of this, the Reuters scoop caused a sell-off in Tesla shares on Friday at around 11:00 am EST. At one point, Tesla shares were down nearly 6%. Just 30 minutes later, Musk tweeted, “Reuters is lying (again)” without giving any specifics as to how or why, and Tesla spiked by 4.9% from $160 to $170.

Note that Musk tweeted this as Tesla approached $160 in its downfall after the Reuters article was published. The $160 level for Tesla shares seems to have some kind of extreme technical resistance both last year and this year:

In April 2023, the stock was about to break below the $160 level (it did twice, but bounced) during 10 trading days. Last month, Tesla tested the $160 level twice again but somehow bounced (see Figure 1). My tinfoil hat theory is that there’s a huge whale (e.g. Musk) who needs Tesla to trade above $160 and is propping it up in order to avoid a margin call.

Figure 1: Someone Badly Needs Tesla to Stay Above $160

Despite Musk’s tweet about the Reuters scoop being a “lie”, Tesla shares still closed down by 3.6% on the day. 49 minutes after Tesla closed down by 3.6% on the day, Musk tweeted, “Tesla Robotaxi unveil [sic] on 8/8”.

Figure 2: Musk’s Revenge Tweet at Reuters’ Scoop on Tesla

After this tweet, Tesla’s stock rose 3.8% to $171 in the after-hours and the Tesla fans have been crowing on Twitter ever since. Two questions immediately come to mind:

1. Why didn’t Musk—who recruited “street fighter” lawyers for Tesla’s legal team after May 2022—threaten to sue Reuters?

2. Why announce the “Robotaxi Unveil” now? If the Tesla Robotaxi were ready to be revealed, why not tweet the unveiling ceremony when Tesla hit dangerous lows in mid-March?

Musk was obviously shocked by the market’s reaction to the scoop and reacted erratically. I doubt that his engineers are ready to unveil the Robotaxi on August 8th.

This may not end well for Musk and I fully expect this story to be the majority of questions on the Q1 2024 earnings call on April 23rd.

The Most Important Points From Reuters’ Huge Scoop on Tesla Canceling the Model 2 Are as Follows (link here):

• Tesla canceled the $25,000, low-cost model (referred to as the “Model 2”), which is the only new product Tesla had in its pipeline. On January’s earnings call, Musk said production would start in the 2H of 2025.

• It seems like suppliers were told production would start in June 2025 (details here), but they realized this was too quick of a timeline given Tesla’s track record of constantly being behind schedule.

• Instead of continuing development of the Model 2, Tesla will move forward with production of the Tesla self-driving robotaxi on the Model 2’s platform.

• Unnamed sources quoted by Reuters said that Tesla had made this decision in February by Musk’s directive “to go all in on robotaxi”.

• Musk’s decision seems to have been affected by the slew of successful launches of affordable EVs by Chinese carmakers (which implies that Tesla gave up hope of being able to compete with them).

• Internal email messages from the Model 2’s program manager show him giving orders to halt all further development for the Model 2 and showed that engineers on the project have already been assigned to new posts as of March 1st.

The Reuters article had 4 sources. Three of them appear to be suppliers, by my guess. Parts suppliers for a new model at carmakers need to be in on the R&D process around 2 to 3 years before the new car is launched. It’s amazing how much engineering time and money Tesla wasted on the Model 2 before scrapping it.

Why the Low-Cost Tesla Model 2 Was Important

• The Model 2 was supposed to be priced at $25,000, sell over 500,000 units per year, and generate an estimated 22% gross margin (see Figure 3).

• Production costs were planned to be 50% lower than the Models 3 & Y via a “revolutionary” method of manufacturing called “unboxed production”.

• The unboxed production system is planned to improve line operator density by 44% and space time efficiency by 30%.

• 500,000 units of the Model 2 per year would be an incremental $2.7 billion in Automotive gross profit and, given the huge decline in profitability of Tesla’s existing old line-up, highly accretive to profitability (see Figure 3).

• Based on these maths, the Model 2 would’ve only stabilized the decline in profitability of Tesla’s existing old line-up, which saw Automotive gross profit peak at $20 billion in 2022 and drop to $16 billion in 2023.

Figure 3: Model 2 Profitability vs the Models 3 & Y

The Implications of This Whirlwind of Communications—It Likely Comes Back to Haunt Tesla

My gut feeling is that this whole back-and-forth between the Reuters scoop and Musk’s attempt to pump the stock back up is that it will end badly. He reacted erratically, as he does on Twitter, and here are my main concerns:

• Model 2 Won’t Sell Well in the US & China: Toyota and Honda own the market for low-priced cars in the US. In China, BYD already sells huge volumes of EVs at $10,000 and they’re exporting them to the EU now.

• The Older the Car, the Bigger the Discounts: As I’ve said ad nauseam, old models lose their attraction to consumers and see sales decline, which is why Tesla cut prices by 29% in 2023 and continues to do so every quarter.

• Refreshes Don’t Work at Tesla, which Skimps on Costs: The only way to keep sales volumes of an old model line-up afloat is to cut prices. The more you cut prices, the harder it is to launch a fully remodeled version at higher prices. The “refreshed” Model 3 is seeing price cuts globally just a few months after its launch. The Model Y (68% of 2023 global sales) will face a similar fate, which is the biggest downside to Tesla’s earnings.

• Even Greater Pump of Tesla Full Self-Driving (FSD): Musk’s robotaxi pump on Friday comes after his proud release of Tesla’s Full Self-Driving (FSD) option for free to all Tesla owners in North America (FSD costs $12,000 as a driver-assist option at Tesla). Based on videos and feedback I’ve seen, my gut feeling is that most Tesla owners who switched the free one-month trial “on” are convinced they won’t use the product, as it’s like letting a drunk driver take control of your car.

• Robotaxi Pump is a Continuation of FSD Pump: This “Robotaxi” pump has been in the works for several weeks to hide Tesla’s imploding car business (see the background in my note here). Because it hadn’t been working to prop up Tesla’s stock, Musk had to take “extreme” measures by tweeting that the Tesla Robotaxi would be unveiled on August 8th. Many speculate that Tesla’s engineers had no forewarning and are scrambling now.

• I’ve been researching the possibility of Tesla going bankrupt by 2027 for the past 3 weeks. My colleagues have pushed back on that concept until now. Look forward to my report on this subject next week.

Figure 4: Tesla’s Valuations & Returns vs Rivals (Ranked by Pre-Tax Margins)

Figure 5: Tesla’s Valuations & Returns Among the Magnificent 7 (Ranked by FCF Yield)

Note: Nothing in this report is investment advice.