Tesla's Profit Margin Surges, Indicating End of Price War

Tesla's Earnings Report

Before the release of Tesla's earnings report, UBS analyst Joe Spak questioned the significance of Tesla's figures this quarter, especially after the Robotaxi reveal which left the markets unimpressed. He suggested that while the numbers should matter, Tesla is more about the future and not the current EV business. The metric investors pay most attention to is the auto gross margins excluding credits, with expectations being for a flat or slightly higher quarter over quarter. Spak also indicated an interest in updates on Model 2.5 for next year and more details on Robotaxi. Bloomberg suggested that Tesla might provide an update on its affordable vehicle platform. Earlier this year, Elon Musk stated that a low-cost model could start production in the first half of 2025.

Expectations and Reality

Analysts were hoping for an update on the affordable vehicle platform during the company’s robotaxi event, but no mention was made. Tesla has yet to share key details about the vehicle, including its price and design. Musk has repeatedly stated that Tesla is evolving beyond just a car company, with a growing focus on artificial intelligence. Tesla’s third-quarter deliveries increased for the first time this year, but the company faces a challenge to break even for 2024. In 2023, Tesla sold around 1.8 million units. As of the third quarter of 2024, sales stood at just under 1.3 million units. To break even, Tesla would need to sell 514,000 units in the fourth quarter, which is 30,000 more EVs than were sold in the fourth quarter of 2023, the company’s all-time peak quarter.

Q3 Report Highlights

Tesla reported the following for Q3: - Revenue of $25.18 billion, slightly below the estimated $25.43 billion - Adjusted EPS of 72c, beating the estimated 60c - Gross margin of 19.8%, surpassing the estimated 16.8% - Automotive gross margin excluding credits jumped to 17.1%, beating estimates of 14.9%, and up from 14.6% in Q2 - Operating income of $2.72 billion, beating the estimated $1.96 billion - Free cash flow of $2.74 billion, surpassing the estimated $1.61 billion - Capital expenditure of $3.51 billion, beating the estimated $2.56 billion While revenues rose 8%, they fell slightly short of expectations. Tesla recognized $739 million in regulatory credit revenues, the second highest quarter in history, as other OEMs are still lagging in meeting emissions requirements.

Boost in Margins

The most notable highlight was Tesla's ability to significantly increase margins, both gross and automotive excluding credits, year on year and above expectations. This suggests that Tesla's aggressive market share strategy is over and the company is now focusing on reaping the benefits of its recent market share gains. Bloomberg noted that if you exclude the regulatory credits, Tesla's profit is being boosted by lower cost per vehicle in terms of production and materials. The energy generation and storage sectors are also starting to perform better.

Profitability and Outlook

Tesla announced that its Cybertruck has reached profitability for the first time, partly due to increased production of the futuristic pick-up truck. In terms of volume, Tesla stated that the company is currently between two major growth waves. The first one began with the global expansion of the Model 3/Y platform. The next one is expected to be initiated by advances in autonomy and the introduction of new products, including those built on their next generation vehicle platform. Regarding Tesla's product outlook, the company stated that its plans for new vehicles, including more affordable models, remain on track for production to start in the first half of 2025.

Record Delivery Year for Tesla?

Despite ongoing macroeconomic conditions, Tesla expects to achieve slight growth in vehicle deliveries in 2024. This is a positive sign and suggests that 2024 may be another record delivery year for the carmaker. The energy business is also thriving, achieving a record gross margin during the quarter. Powerwall deployments set a record for the second straight quarter while the ramp up of Powerwall 3 continues.

Next-Generation Platform

According to Tesla’s investor deck, the next-generation platform will have a powertrain with an efficiency of 5.5 miles per kWh. Lucid, one of Tesla’s competitors, claims that it has the world’s most efficient car - the Lucid Air Pure - that can achieve about 5.0 miles per kWh. However, the Lucid vehicle is currently available, while Tesla’s next-generation platform may be years away.

Stock Surge

Following the release of the report, the company's stock surged almost 9% after hours, reaching a high of $234.89 after closing at $213.65. If this holds, Tesla will gain about $60 billion in market value, which would be the biggest gain since July 2.

Bottom Line

Tesla's third-quarter report shows a significant increase in profit margins, suggesting an end to the price war and a shift in focus towards capitalizing on recent market share gains. The company's outlook is optimistic, with plans for new vehicles on track and expectations of growth in vehicle deliveries. However, the success of these plans remains to be seen. What are your thoughts on Tesla's performance and future prospects? Share this article with your friends and let us know your opinion. Don't forget to sign up for the Daily Briefing, which is every day at 6pm.