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Tesla Stock: Margins Bounce Back For AI-Leader
Tesla is arguably one of the most advanced AI companies in the world, yet its stock is dictated by margins. Over the past three years, Tesla's average gross profit per vehicle has declined by 60%, falling from more than $14,400 in Q3 2021 to less than $6,000 in Q2 2024, highlighting the difficulty Tesla has faced in a high-interest rate environment.
Higher interest rates have forced Tesla to place more emphasis on affordability, either via price cuts or promotional financing rates, pushing average selling prices lower and thus impacting margins. Q3's report showed that margins may have bottomed, despite weakness in vehicle selling prices due to that focus on affordability.
AUSTIN, TEXAS - APRIL 15: A Tesla Cybertruck sits on a lot at a Tesla dealership on April 15, 2024 ... [+] in Austin, Texas. Tesla is planning to lay off more than 10% of its employees as the company continues to see a decrease in sales, which began earlier this year. (Photo by Brandon Bell/Getty Images)
Getty ImagesPerhaps the long-term story is recurring software revenue from robotaxis and humanoid robotics, however, margins are driving the stock price for now.
Below, I look at the puts and takes of an AI front runner that is battling economic headwinds.
Deliveries Recover, But Revenue Doesn'tQ3 saw Tesla report sequential growth for both production and deliveries after a weak Q1, where deliveries dropped below 400,000 for the first time since late 2022. Tesla reported deliveries of 462,890 EVs in the third quarter, a 6.4% increase from last year and a 4.3% increase from the second quarter.
Tesla reported deliveries of 462,890 EVs in the third quarter, a 6.4% increase from last year and a ... [+] 4.3% increase from the second quarter.
Source: I/O FundFor the third quarter, Tesla reported automotive revenue of $18.83 billion, up just 1.3% YoY and 1.6% QoQ, and short of the consensus estimate for $19.50 billion. As a result, Tesla's overall revenue fell short of estimates, with Tesla reporting $25.18 billion in revenue, nearly half a billion below the consensus for $25.67 billion.
A quick look at the growth rates shows that automotive revenue growth lagged delivery growth by just over 5 percentage points, at 1.3% versus 6.4%. This tells investors that automotive selling prices declined once again, and to a large degree – Q3's ASP fell below $42,000, down ~(1.7%) from Q2 and falling (5.6%) from nearly $44,500 last year.
Notably, there is risk the ASPs fall lower in Q4 as Tesla continues to cut some prices, with the Cybertruck seeing up to 20% cuts on different model variants in October. Musk mentioned that Tesla would be aiming for YoY growth, and with just Q4 left, that means Tesla would have to deliver more than 515,000 vehicles, a record high. This would also imply an acceleration to 11% QoQ growth, leaving the door open for more aggressive price cuts to spur demand, something management hinted at in the earnings call.
Tesla is aiming high for 2025, with Musk stating that the automaker is shooting for "20% to 30% vehicle growth next year," or roughly at least 2.1 million vehicles assuming Tesla ends 2024 at around 1.75 million. Taneja added that Tesla's "focus remains on growing unit volume, while avoiding a build-up of inventory. To support this strategy, we're continuing to offer extremely compelling vehicle financing options in every market."
The Fed has forced Tesla to focus on financing and affordability, which in turn, has been a major driver of margin issues. I noted in July 2023 that the "comment on interest rates is the most important comment from the call as high interest rates mean Tesla must lower prices," and that Tesla was "one of many tech stocks whose revenue growth and profitability is on borrowed time until the Fed instills a more dovish policy."
Tesla's Profitability Improved on Cost OptimizationsDespite ASPs declining again sequentially, profitability improved and automotive margins recovered as Tesla captured some tailwinds from "lower raw material costs, freight and duties" and drove vehicle production costs to a record low.
Tesla headed into Q3's report facing a tough test, as average selling prices were flat and vehicle production costs were rising. From Q4 2023 to Q2 2024, ASPs were relatively unchanged while production costs rose 3.7%, denting both automotive margins and impacting profitability. This had been hindering Tesla's ability to revitalize automotive gross margins — as a result of those two changes, automotive gross margins took quite a large hit, falling from 17.2% to 14.6% in that two-quarter span.
Q3 saw a sharp improvement in automotive gross margin, expanding ~240 bp QoQ and ~72 bp YoY, as ... [+] Tesla drove production costs to a record low of ~$35,106.
Source: I/O FundQ3 saw a sharp improvement in automotive gross margin, expanding ~240 bp QoQ and ~72 bp YoY, as Tesla drove production costs to a record low of ~$35,106, dropping ~(4.6%) from $36,802 just last quarter.
Because of the large improvements in production costs, average gross profit per vehicle bounced back, increasing ~16.3% QoQ to reach ~$6,886, up from $5,921 last quarter. Essentially, Tesla manufactured and sold 14,000 more vehicles this quarter for ~$220 million cheaper than last quarter.
Average gross profit per vehicle bounced back, increasing ~16.3% QoQ to reach ~$6,886, up from ... [+] $5,921 last quarter.
Source: I/O FundOperating margin also rebounded significantly, expanding to 10.8% in Q3, up from 6.3% in Q2 and 5.5% in Q1. This newfound operating margin growth adds more confidence in the margin recovery story, which has been paramount for investors as share price declines have correlated quite closely with operating margin contraction.
Tesla's share price declines since late 2021 have correlated quite closely with operating margin ... [+] contraction.
Source: YChartsEnergy Storage was a bright spot in Q3 as even with a sequential decline in deployments and (21%) sequential decline in revenue, gross margin expanded from 24.5% to 30.5%. This aided company-wide gross margin expansion, with Tesla reporting a 19.8% gross margin in Q3, up from 18.0% in Q2.
Q4 Margins Will Be "Challenging" to SustainQ3's profitability is a welcome sign, yet CFO Vaibhav Taneja cautioned that "sustaining these margins in Q4, however, will be challenging given the current economic environment," due to vehicle affordability issues.
Investors may need to get comfortable with thinner margins moving forward on the automotive side. When the stock was at all-time highs in 2021 and early 2022, Tesla was reporting more than $14,000 in gross profit per vehicle, or automotive gross margins in the high-20% range, topping 30% once. Now, average gross profit per vehicle has fallen more than (52%) to $6,886 in Q3, with automotive gross margins back to 17%, though it has remained below 20% since the start of 2023.
This decline in gross profit per vehicle stems from weaker average selling prices, which have fallen quite dramatically since the start of 2023, and continue to fall. The reason margins were able to expand in Q3 was from reducing production costs, not vehicle pricing.
Tesla's average selling prices, which have fallen quite dramatically since the start of 2023, ... [+] continue to fall.
Source: I/O FundAs long as Tesla continues to cut prices, margin gains will be primarily realized on the cost side. The path to higher margins will arise when Tesla can push production costs towards $30,000 and lower, and once the pressure on ASPs have resolved.
Musk said in Q3's call that Tesla is "still on-track to deliver more affordable models starting in the first half of 2025," which would require similar cost reductions to preserve margins. Musk also implied thin margins may be the norm for investors, as Tesla noted that affordable model production in the first half of 2025 "will result in achieving less cost reduction than previously expected."
Robotaxis Still Not Here, Despite Numerous TimelinesWhile the robotaxi opportunity is promising for Tesla, it's yet to provide tangible AI revenue. Tesla's robotaxi reveal event earlier in the month was met with a lackluster response, sending shares down more than (8%) the day after, as the production timeline for its 'robotaxi' was pushed back once more, a familiar storyline for Tesla investors over the past few years.
At the unveiling of Tesla's pedal and wheel-free purpose-built robotaxi, dubbed the Cybercab, CEO Elon Musk said that production may begin in 2026 or as late as 2027, saying that he "tend[s] to be optimistic about timeframes." This is another years-long delay for Tesla's most anticipated product, where in 2022, Musk had promised to reveal the robotaxi in 2023 and start production in 2024. This follows an initial promise from 2019 to have one million Tesla vehicles equipped with Level-5 autonomy in 2020. Years later, and Tesla has still not deployed the robotaxi, which places additional emphasis on the margins.
Musk reiterated Tesla's goal to launch production of the Cybercab in 2026, adding that Tesla is "aiming for at least 2 million units a year of Cybercab."
Following Q1's earnings report in April 2024, I joined Bloomberg China to discuss the most pressing items for Tesla, saying that "as AI approaches, that's the piece that Tesla has to execute on. So what we're seeing is a moment where it's a little too early for AI software…. We're not in that cycle right now, and that's what Tesla really truly needs for its stock to resume where it was before as a Wall Street darling [in 2021]. And that AI software cycle, if I were to give you my best estimate, it would be more of a 2026 discussion."
ConclusionDespite a mixed Q3 earnings report featuring a revenue miss and an EPS beat, Tesla's report exceeded expectations in the one area that mattered most – margins. Automotive gross margin rebounded due to production cost improvements, even as selling prices fell, boosting operating margins back to the double-digit range.
While the AI story is one to watch, margins have been the behind-the-scenes driver for shares, and remain the data point to track until a credible, tangible revenue stream from robotaxis arises. I/O Fund Portfolio Manager Knox Ridley wrote in August 2023 as the I/O Fund cut our Tesla position for a 60% gain that the I/O Fund was "avoiding 'Crocodile Jaw' situations where the stock price is going up but fundamentals are decelerating."
By closely following Tesla's margins and fundamentals, the I/O Fund nailed Tesla's move off of 2022's lows and exited at a top in early 2023. The I/O Fund continues to track Tesla, but recently shared research with premium members on two AI beneficiaries in a lesser-known semiconductor space with standout EPS numbers. Learn more here.
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I/O Fund Equity Analyst Damien Robbins contributed to this report.
Tesla's Stock Is Having Its Best Day In More Than Three Years
Tesla's stock is having its best day in more than three years
Tesla's stock is soaring Thursday in what could amount to its best daily performance in about three and a half years.
"It's hard to be anything but optimistic," a Piper Sandler analyst wrote. He thought the company offered more detail than usual in its earnings call, and analysts generally are cheering improved financial metrics.
That's driving a 17% boost in Tesla's stock price shortly after Thursday's open. If that gain carried through to the close, it would amount to the biggest one-day percentage move higher for Tesla's stock since a 19.6% rally on March 9, 2021.
(Justin Sullivan/Getty Images)
Tesla
TSLA (U.S.: Nasdaq)
Tesla Stock Soars 22% For Best Day In Over A Decade On Musk's 2025 Growth Projection
Tesla shares soared 22% to close at $260.48 on Thursday, the stock's best day since 2013, following the company's better-than-expected earnings report.
The company late Wednesday reported revenue of $25.18 billion, which came in just under analysts' expectations of $25.37 billion, but was up 8% compared with a year earlier. Tesla reported earnings per share of 72 cents adjusted, topping the average analyst estimate of 58 cents.
"We expect this surprising earnings beat to power a strong positive reaction in Tesla shares Thursday, given the degree to which investors have become conditioned to earnings misses from the company," analysts at JPMorgan wrote in a note.
Tesla's profit margins in the third quarter were boosted by $739 million in revenue for environmental regulatory credits, which the JPMorgan analysts noted were a "potentially unsustainable driver" of earnings and cash flow.
Automakers are required to obtain a certain amount of regulatory credits every year, and if they can't meet the target, they can buy credits from other companies. Tesla has excess credits because it only makes electric vehicles.
Tesla earnings also got a boost from FSD, the company's Full Self-Driving Supervised system. CFO Vaibhav Taneja said on the earnings call that FSD contributed $326 million in revenue in the quarter after Tesla made it available for use in the Cybertruck and added a feature called "Actually Smart Summon."
CEO Elon Musk said on the call that his "best guess" is that "vehicle growth" will reach 20% to 30% next year, citing "lower cost vehicles" and the "advent of autonomy." Analysts surveyed by FactSet were expecting delivery growth of about 15% for 2025.
Even bullish Deutsche Bank analysts doubted Musk's forecast and wrote, in a note following the earnings report, "Our view remains more reserved at 10-15% (~2.03m)," and assumes Tesla can roll out a cheaper version of its Model Y at a price under $30,000 after subsidies, and other variants of the small SUV.
Analysts at Morgan Stanley who also recommend buying the stock, called Musk's 2025 vehicle delivery growth prediction a "maybe." They set their estimate at 14%.
It "clearly depends on the company's ability to improve affordability through cheaper model (next gen) introduction, financing offers and improved features," the Morgan Stanley analysts wrote in a note Thursday.
A grain of saltMusk said on the Wednesday call that Tesla plans to start production of its recently unveiled Cybercab, a robotaxi with butterfly doors and no steering wheel or pedals, by the end of 2026. He also said Tesla would conduct driverless ridehailing in California and Texas next year in its existing cars, which are not currently safe to use without a human driver ready to steer or brake at any time.
Bernstein analysts, who have a bearish price target of $120 on shares of Tesla, wrote in a note out Thursday: "The tone of Tesla's conference call was ebullient and filled with Musk prognostications that have historically polarized bull and bear investors, and was more akin to a pep rally, with the company only taking two questions from sell-siders."
Musk has for years promised shareholders a software upgrade that can turn Teslas into robotaxis. That hasn't happened yet. Musk has also promised a refreshed version of the Tesla Roadster since 2017. The design of the vehicle is not yet complete.
The Bernstein analysts wrote, "We continue to struggle to see Tesla overcoming the technological and regulatory hurdles needed to leapfrog current level 4 robotaxis, and believe fully unsupervised FSD could be years away."
They pointed to Musk's "long history of being overly optimistic about FSD" and said crowdsourced research that shows "Tesla continues to lag well behind competitors" on robotaxis.
The share rally Thursday was the sharpest since a 24% gain in May 2013. The jump erased Tesla's loss for the year and left the stock up 3% in 2024, though it still trails the 22% gain for the Nasdaq.
WATCH: Tesla's price war is over
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