Tesla Inc (NASDAQ:TSLA). CEO Elon Musk announced on Thursday that he and the board of the electric vehicle company would discuss a potential $5 billion investment in his artificial intelligence startup, xAI, raising concerns about a conflict of interest.
Musk, who is also the world’s richest person, launched xAI last year to compete with Microsoft-backed OpenAI. This has led to worries that he might allocate Tesla’s resources to support his AI venture.
On Tuesday, Musk conducted a poll on the social media platform X, asking whether Tesla should invest $5 billion in xAI. More than two-thirds of nearly one million respondents voted in favour, though it is unclear how many of them are Tesla investors.
The poll followed Tesla’s announcement that its second-quarter automotive gross margin and profit fell short of Wall Street estimates due to price cuts and sales incentives. "Looks like the public is in favour. Will discuss with Tesla board," Musk posted on X.
"Tesla missed earnings estimates for the fourth quarter in a row, extending its tumultuous 2024. Most other key metrics missed estimates, but revenue did jump to $25.5 billion, above the $24.6 billion expected.
"After a better-than-expected delivery result at the start of Q2, shares have been on a tear, spurred on by price cuts. However, that positivity has come back to bite, with its automotive gross margin excluding regulatory credits falling to 14.6%, lower than the 16.4% in the first quarter, wrote eToro market analyst Josh Gilbert.
"One of the biggest disappointments is the view of ‘notably lower’ vehicle sales in 2024. Essentially, we may see a year where Tesla doesn’t see vehicle delivery growth, and that would be a real sucker punch for investors, with profitability falling on the view of higher volume promised by Elon Musk.
"Cybertruck production has stepped up significantly, and production looks to be profitable by year-end, while plans for its low-cost vehicle are being made for 2025, a few positives to takeaway. However, little mention of what’s next for Robotaxi, with a specific focus on AI, will leave Wall Street yearning.
"We needed some Musk magic on the earnings call to reassure investors after these lacklustre results, but we got nothing of the sort. He was subdued and offered little insight as to what’s next for investors, and that will put shares under pressure over the days ahead."
In whose interests?
During Tesla’s earnings call on Tuesday, Musk mentioned that xAI would aid in advancing full self-driving technology and developing a new Tesla data centre, suggesting potential integration of xAI's chatbot, Grok, with Tesla’s software.
Despite significant investments, most AI firms are still formulating business models while incurring high technology costs.
Brent Goldfarb, a business school professor at the University of Maryland, commented, "It's hard to make a claim that this is in the best interest of Tesla shareholders," noting it could be seen as a transfer of Tesla’s wealth.
He added: "In AI in general, nobody is quite sure where the money is going to be made and who is going to pay for it. AI right now has all the signs of a bubble."
In 2018, Musk left OpenAI, which he co-founded, due to a potential conflict with Tesla's development of AI software for self-driving vehicles. In April, Musk revealed that xAI was hiring some engineers from Tesla to retain talent amid competition from OpenAI.
xAI raised $6 billion in series B funding in May, achieving a post-money valuation of $24 billion, with investors including Andreessen Horowitz and Sequoia Capital.
Musk has indicated that a quarter of xAI will be owned by investors in X, the social media firm he purchased for $44 billion, whose value has since declined.
Musk has faced previous criticism over potential conflicts of interest among his various companies.
Tesla shareholders had alleged that the 2016 acquisition of SolarCity, a rooftop solar company founded by Musk and his cousins, for $2.6 billion amounted to a bailout. However, the Delaware Supreme Court upheld a ruling last year that Musk did not push Tesla to overpay for SolarCity.