Tesla’s recent troubles, including declining sales and slim margins, stem from deeper issues within the company, with Elon Musk’s political affiliations merely adding to its woes.
Tesla’s disappointing first-quarter results were marked by a concerning drop in its automotive gross margin, a key metric for any carmaker. The figure, which strips out the sales of regulatory credits, slumped to 12.5%, marking its lowest point in over a decade. This decline, according to Morgan Stanley, recalls a time when Tesla was still grappling with the challenges of being a startup. Tesla’s adjusted earnings were almost 40% below consensus forecasts, which were already on a downward trajectory.
While the company did manage to eke out positive free cash flow, it did so by cutting capital expenditure nearly in half and making favorable moves with accounts payables and receivables. However, Tesla suspended its guidance due to “shifting global trade policy,” further muddying the waters for analysts and investors. The irony here is stark: Tesla’s struggles coincide with the very policies championed by the US president, with whom Musk has long had a close relationship.
Despite the grim numbers, Tesla’s stock saw a surprising uptick of almost 5% in after-hours trading. Some analysts argued that the disappointing results were largely priced in, given that Tesla’s factory turnarounds and weaker-than-expected sales were anticipated. However, with Tesla’s stock still trading at 85 times forward earnings, even the suspension of guidance didn’t seem to convince all investors.
A key factor contributing to the relative optimism among investors was Musk’s announcement that he would be stepping back from his involvement with the US Department of Government Efficiency (DOGE), although only “a bit.” This decision follows his vocal support for the government efficiency initiative, which some believe has done more harm than good for Tesla’s brand. However, this decision to take a step back—while maintaining a significant role—seems like mixed messaging for those already critical of his political leanings.
Musk’s alignment with the political right, and in particular with former US President Donald Trump, has already created friction in markets outside the US, especially in Europe and among the progressive customer base in states like California. But the deeper issue for Tesla isn’t so much politics; it’s the company’s aging vehicle lineup clashing with growing competition. While Musk’s political engagement may have accelerated the decline, it didn’t cause it.
Before Musk’s high-profile political associations, Tesla was already struggling to keep pace with rivals, including the underwhelming reception of its highly anticipated Cybertruck. Tesla’s focus on high-end models, such as the Cybertruck, has also hindered the company’s ability to develop more affordable EVs. Musk’s grand plans for a low-cost vehicle remain elusive, with little sign of relief in sight.
In an ironic twist, Tesla’s reliance on regulatory credits—which are unpopular with Republican lawmakers—has had a substantial impact on the company’s finances. In 2023, regulatory credits made up 31% of Tesla’s pre-tax earnings. In the first quarter of 2025, however, they accounted for 101%. Without these credits, along with income from interest and speculative crypto investments, Tesla’s core operations posted a loss.
Despite the challenging current state of affairs, Musk’s focus remains firmly on the future. He emphasized that Tesla’s robotaxi pilot program in Austin, slated for June, will be a stepping stone toward his vision of autonomous vehicles dominating the transportation landscape. However, Musk cautioned investors not to expect robotaxis to significantly contribute to the company’s bottom line until the latter half of 2026.
For now, Tesla’s future seems a precarious balance between hope and reality—facing fierce competition and the need for a major shift in both products and strategy. The company’s heavy reliance on regulatory credits and its struggle with an outdated vehicle lineup are issues that can’t be masked by political rhetoric or bold future predictions.
