Tesla's profit margin is being affected by discounts on electric vehicles and high spending on artificial intelligence.

• In the second quarter, Tesla's operating margin decreased to its lowest point in three years.
• The company has been attempting to halt a decrease in car sales by providing substantial rewards and significant price reductions.
• On Tuesday, the stock dropped by 8% in extended trading after Wall Street's profit estimates were missed.

Despite CEO Elon Musk's grand promises about Tesla's future in autonomous driving and robotics, investors are closely monitoring the company's declining profit margins.

Tesla reported its adjusted operating margin decreased to the lowest in three years, reaching 14.4% in the second quarter, down from 18.7% in the same period last year. This marks the fourth consecutive quarter of shrinkage.

The company's net income was $1.48 billion on $25.5 billion in revenue, with $890 million in regulatory credits.

Tesla is facing rising expenses as it invests in AI infrastructure to create self-driving cars and develop humanoid robots for factory work and beyond.

This year, the demand for Tesla's top-selling electric vehicles has decreased, prompting the company to take measures such as price cuts and low-interest loans to boost sales.

"Tesla's chief accounting officer, Vaibhav Taneja, stated on the company's earnings call that affordability is a top priority for customers. In response to this, Tesla offered attractive financing options in Q2 to offset sustained high interest rates."

On Tuesday, Tesla's stock price in extended trading decreased by approximately 8%, reaching $227.23. Despite this, Tesla had only experienced a slight decline of less than 1% for the year, while the Nasdaq had experienced a significant increase of 20% during the same period.

Tesla's investor deck stated that the decline in operating income was partly due to the reduced average selling price and lower deliveries of its top EVs. The automotive revenue decreased by 7% from the previous year, marking the second consecutive decline, as competition intensified, particularly in China.

Tesla initially offered a five-year, zero interest loan in China to boost sales of its EVs in April. However, the deal was extended until the end of July. On Tuesday, the company announced that it had extended the offer again, as reported by CnEVPost, a Shanghai-based EV news site.

Tesla introduced 0% financing for four years for buyers of the new Model Y Long Range All-Wheel Drive in Germany, where the company has its only European car factory.

In May, Tesla provided a financing deal in the U.S. for some Model Y purchases, with an annual percentage rate (APR) of 0.99% and terms ranging from three to six years.

"Taneja announced that competitive financing rates are now available in many regions, making it the ideal time to purchase a Tesla. He urged potential buyers to take advantage of the opportunity and purchase their car."

Ronald Jewsikow, a Guggenheim analyst who recommends selling Tesla shares, published a note ahead of the earnings report on Tuesday titled "Do Earnings Matter?" In it, he predicted the company's automotive gross margin would miss estimates, "driven by large discounting actions."

'Double down on Dojo'

Tesla is facing a more competitive electric vehicle market but is also pushing to stay ahead and catch up with companies like Waymo in the robotaxi market. The company is investing heavily in autonomy and has the Optimus humanoid robot project, which Musk says will eventually make Tesla worth tens of trillions of dollars.

To achieve those efforts, Tesla must construct data centers with GPUs and develop its own AI processors, which resulted in a 39% increase in operating expenses to $2.97 billion in the second quarter, with capital expenditures on AI infrastructure totaling $600 million.

Musk stated on the call that the company plans to intensify its efforts on "Dojo," its supercomputer, in order to maintain a competitive edge against Nvidia.

Musk previously pledged to construct a $500 million Dojo supercomputer in Buffalo, New York. However, the company is currently constructing a wing of its factory in Austin, Texas, to house a data center instead.

""Since the demand for Nvidia GPUs is extremely high and it's their responsibility to increase prices to meet the market, we must make Dojo successful," Musk stated."

Musk emphasized on Tuesday that investors fixated on short-term profits are in the wrong company. He characterized current challenges as "noise."

Tesla will reveal its robotaxi, the CyberCab, at an unveiling event on October 10, two months later than originally planned, according to Musk. He stated that he would be surprised if Tesla does not provide autonomous rides by next year. In addition to the CyberCab, Musk has been promising for years that Tesla will transform its customers' existing EVs into self-driving vehicles through software updates.

Tesla plans to enhance its driver assistance software, Full Self-Driving Supervised, and introduce a new AI5 hardware component to enable its electric vehicles to function as fully autonomous cars without the need for a human driver to steer or brake at all times.

"Autonomy is the primary value of Tesla, and any other features are merely an inconvenience compared to it. Therefore, if you don't believe that Tesla will solve vehicle autonomy, you should not invest in Tesla stock."

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