Elon Musk's 'Razor-And-Blade' Strategy Could Jeopardize Tesla's Long-Term Growth, Says Munster

Tesla, Inc. TSLA earnings are now in the rearview mirror. CEO Elon Musk's comments on the earnings call, however, will likely have a profound impact on how the electric vehicle maker does business going forward.

Rethink Needed: Musk said that Tesla could sell vehicles at no profit as it has the opportunity to make tremendous economics in the future through autonomous software.

Terming the approach a "razor-and-blade" business model, Deepwater Asset Management Managing Partner Gene Munster said, investors may have to rethink the Tesla investment case.

A razor-and-business model is a strategy of selling a product at dirt-cheap prices or at free of cost in order to increase sales of a complementary product or consumables.

The idea is to sell the hardware, primarily the cars at no profit so that they can sell the full-self driving software at such a high margin that it increases a car's overall profitability, the fund manager said.

As opposed to Musk's view, Tesla’s FSD will be made available by the end of the year, Munster sees broader availability in three to five years' time., This is because of the track record on the topic and regulatory concerns about wide deployments, he said.

As Tesla looks at an investment of $150 billion to $175 billion over the next decade, the company needs to maintain operating margins of more than 15% and ramp up revenue as well, the tech expert said.

"Cutting near-term profits would jeopardize the company's long-term goals," he added. "In the end, I believe the company will strike a balance between margins and growth.”

See Also: Everything You Need to Know About Tesla Stock

Core Metric Disappoints:  Munster noted that auto gross margin, excluding regulatory credits, came in at 19% compared to expectations of 20%. This key metric has come in below expectations for a second straight quarter, he noted.

CFO Zach Kirkhorn did not issue guidance for the metric for the June quarter, citing factors outside the control of the company such as the impact of interest rates on demand and material costs.

Talking Down On Guidance: According to Munster, Musk changed the language of the 2023 deliveries guidance by referring to the previously stated internal target of 2 million units as an “outside case.”

That target is achievable but has to come at the expense of more upcoming price cuts, Munster said. "At current pricing, I think it's unlikely they get there.”

What Else: Munster noted that Tesla expects Cybertruck production to begin later in the September quarter, in line with the previous comments. 

The company is positioning itself to "ride Cybertruck's ramp in 2024 and the Model A ramp in 2026, giving hope to investors that the delivery growth party will only continue," the fund manager said.

Tesla also reiterated that it is working on a next-gen vehicle platform, internally called Robotaxi, Munster said. Musk left the door open for the price to be higher, given there could be a "Model 3 or Model Y Robotaxi, a robotic taxi," he said.

Tesla ended Wednesday's session down 2.02% at $180.59 in reaction and fell an incremental $6.07% to $169.63 in after-hours trading, according to Benzinga Pro data.

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