Tesla is arguably one of the most advanced AI companies in the world, but its stock price is driven by profits. Over the past three years, Tesla’s average gross profit per vehicle has declined by 60%, from more than $14,400 in Q3 2021 to less than $6,000 in Q2 2024. This highlights the difficulties that companies face in a high interest rate environment.
Rising interest rates are forcing Tesla to focus more on affordability through price cuts and promotional financing rates, lowering average selling prices and impacting profit margins. The third-quarter report showed that profit margins may have bottomed out, even as vehicle sales prices were depressed due to a focus on affordability.
AUSTIN, TEXAS – APRIL 15: April 15, 2024…(+) A Tesla Cybertruck on the lot of a Tesla dealership in Austin, Texas. Tesla plans to lay off more than 10% of its workforce as sales continue to decline since the beginning of this year. (Photo by Brandon Bell/Getty Images)
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Perhaps the long-term story is continued software revenue from robotaxis and humanoid robots, but for now profit margins are driving the stock higher.
Below, we take a look at the achievements of AI frontrunners as they battle economic headwinds.
Delivery will recover, but revenue will not.
Tesla reported sequential increases in both production and deliveries in the third quarter, after a weak first quarter in which deliveries fell below 400,000 vehicles for the first time since late 2022. Tesla reported 462,890 EV deliveries in the third quarter, up 6.4% year-over-year and 4.3% year-over-year. % increase from Q2.
Tesla reported 462,890 EV deliveries in the third quarter, up 6.4% year over year and up … (+) 4.3% from the second quarter.
Source: I/O Fund
Tesla’s auto sales for the third quarter were $18.83 billion, up 1.3% year-over-year and 1.6% sequentially, missing consensus estimates of $19.5 billion. As a result, Tesla’s overall revenue was lower than expected, with Tesla reporting revenue of $25.18 billion, nearly $500 million below the consensus of $25.67 billion.
A quick look at growth rates shows that auto revenue growth lags vehicle delivery growth by just over 5 percentage points, 1.3% vs. 6.4%. This tells investors that car selling prices have once again fallen significantly – ASP for the third quarter was below $42,000, down (1.7%) from the second quarter and from almost $44,500 last year. (5.6%) decreased.
In particular, there is a risk of ASP falling in the fourth quarter as Tesla continues to cut some prices, with the Cybertruck expected to see price cuts of up to 20% across various model variants in October. Musk said Tesla will aim for year-over-year growth, meaning Tesla will have to deliver more than 515,000 vehicles, a record high, with only a few days left in the fourth quarter. He said he is doing so. This also means an acceleration to 11% quarter-over-quarter growth, and leaves the door open for more aggressive price cuts to stimulate demand, management suggested on the earnings call. did.
Tesla has lofty goals for 2025, with Musk saying the automaker expects “20% to 30% vehicle growth next year,” assuming Tesla ends 2024 with about 1.75 million vehicles. The company said it is targeting at least 2.1 million units. Taneja added that Tesla “continues to focus on increasing unit sales while avoiding inventory buildup.” To support this strategy, we continue to offer highly attractive vehicle financing options in all markets. ”
The Fed is forcing Tesla to focus on financing and affordability, which is a big factor in the margin issue. In July 2023, I said, “Comments on interest rates were the most important comments on the conference call because high interest rates mean Tesla needs to lower prices,” and Tesla said, “Earnings growth and is one of many tech stocks whose profitability increases with borrowing time, until the Fed instills a more dovish policy. ”
Cost optimization improves Tesla’s profitability
Even though ASP declined again last quarter, profitability improved as Tesla received tailwinds from “lower raw material costs, transportation costs, and tariffs” that pushed vehicle production costs to record lows. Automotive profit margins have recovered.
Tesla entered its third-quarter report facing a tough challenge as average selling prices remained flat and vehicle production costs rose. From Q4 2023 to Q2 2024, ASP remained relatively unchanged, but production costs increased by 3.7%, reducing automotive margins and impacting profitability. This was hampering Tesla’s ability to recover its car gross margins. As a result of these two changes, automotive gross margins took a pretty big hit, dropping from 17.2% to 14.6% in those two quarters.
Automotive gross margin improved significantly in the third quarter, expanding by approximately 240 bp sequentially and approximately 72 bp year over year. This is because… (+) Tesla has pushed production costs down to an all-time low of about $35,106.
Source: I/O Fund
In the third quarter, auto gross margins improved significantly as Tesla lowered its production costs to an all-time low of ~$35,106, down ~(4.6%) from $36,802 in the previous quarter, increasing by approximately 240 bp, an increase of approximately 72 bp compared to the same period last year.
Due to significant improvements in production costs, average gross profit per vehicle recovered, increasing approximately 16.3% sequentially to approximately $6,886 from $5,921 in the prior quarter. Essentially, Tesla built and sold 14,000 more vehicles this quarter for about $220 million less than the previous quarter.
Average gross profit per vehicle rebounded, increasing ~16.3% sequentially to ~$6,886, up from …(+) $5,921 in the prior quarter.
Source: I/O Fund
Operating margin also recovered significantly, expanding from 6.3% in the second quarter and 5.5% in the first quarter to 10.8% in the third quarter. This new operating margin growth provides further confidence in the prospects for a margin recovery, which has been a top priority for investors, as it is highly correlated with falling stock prices and shrinking operating margins. It will be.
The decline in Tesla’s stock price since the second half of 2021 is very closely correlated with the decline in operating profit margin…(+).
Source: YCharts
Energy storage was a bright spot in the third quarter, with gross margin widening from 24.5% to 30.5% despite continued declines in installations and sequential declines in revenue (21%). This helped drive gross profit margin expansion across the company, with Tesla posting a gross profit margin of 19.8% in the third quarter, up from 18.0% in the second quarter.
Maintaining profit margins in the fourth quarter will be ‘difficult’
While third-quarter profitability is a welcome sign, Chief Financial Officer Vaibhav Taneja said vehicle affordability issues made it difficult to maintain this margin in the fourth quarter. “It will be difficult given the economic environment in the country.”
Investors may have to get used to thinner margins going forward in the auto sector. When the stock reached all-time highs in 2021 and early 2022, Tesla was generating more than $14,000 in gross profit per vehicle, or an auto gross profit margin in the low 20s, and at one point as much as 30%. It was reported that it exceeded. Now, the average gross profit per vehicle in the third quarter is $6,886, down more than (52%), and the auto gross profit margin is back to 17%, but still at 20% in 2023. is below.
This decline in gross profit per vehicle is due to a decline in average selling prices, which have fallen significantly since the beginning of 2023 and continue to fall. The reason we were able to expand our margins in the third quarter was due to lower production costs, not vehicle prices.
Tesla’s average selling price has fallen significantly since the beginning of 2023 and continues to… (+) fall.
Source: I/O Fund
As long as Tesla continues to lower prices, any increase in profits will come primarily from costs. If Tesla can push production costs below $30,000, relieving pressure on ASP, it could pave the way for higher profit margins.
Musk said on the third-quarter conference call that Tesla “plans to introduce more affordable models starting in the first half of 2025,” and that similar cost reductions will be needed to remain profitable. Musk also noted that Tesla “will likely achieve less cost savings than previously expected” by producing affordable models in the first half of 2025, so thin profit margins are the norm for investors. suggested that there was a possibility.
Despite many timelines, robotaxis are still not a reality
The robotaxi opportunity is promising for Tesla, but tangible revenue from AI has yet to emerge. Tesla’s robotaxi announcement event earlier this month was met with a lackluster response, with the stock dropping more than (8%) the next day. That’s because the company’s robotaxi production schedule has been postponed yet again, a familiar story for Tesla investors. The last few years.
At the unveiling of Tesla’s pedal-less, wheel-less robotaxi called CyberCab, CEO Elon Musk said production could begin in 2026 or at the latest in 2027. “There is a tendency to be optimistic about the timing,” he said. Musk had promised in 2022 that robotaxi would be unveiled in 2023 and production would begin in 2024, but this would be another year’s delay for Tesla’s most anticipated product. This follows an earlier promise to equip 1 million Tesla vehicles with Level 5 starting in 2019. Years later, Tesla still hasn’t introduced robotaxis and is more focused on margins.
Musk reiterated Tesla’s goal to begin production of the CyberCab in 2026, adding that Tesla is “aiming for at least 2 million CyberCabs per year.”
Tesla offers deep discounts, entry points now available: I/O Fund (youtube.com)
Following the first quarter earnings call in April 2024, I joined Bloomberg China to discuss the most pressing items for Tesla and said, “As AI approaches, this is what Tesla must do.” said. So what we’re witnessing is a moment a little too early for AI software… We’re not in that cycle right now, and that’s really what Tesla needs (in 2021) to get its stock back to where it was as a darling of Wall Street. And my best estimate of that AI software cycle would be a 2026 discussion. ”
conclusion
Despite a mixed third-quarter earnings report featuring missed sales and EPS growth, Tesla’s report beat expectations in one area that matters most: margins. Automotive gross profit margins recovered due to improvements in production costs, and operating profit margins returned to double digits despite lower selling prices.
While the AI story is one to watch, margins are a behind-the-scenes driver of stock prices and will remain a data point to track until there is a reliable and tangible revenue stream from robotaxis. Knox Ridley, I/O Fund’s portfolio manager, said in August 2023 that when I/O Fund reduced its position in Tesla for a 60% gain, I/O Fund said, “However, we are avoiding a ‘crocodile jaw’ situation where the fundamentals deteriorate.” It’s slowing down. ”
By closely tracking Tesla’s returns and fundamentals, I/O Fund was able to help Tesla break out of the 2022 lows and exit at the highs in early 2023. I/O Fund continues to track Tesla and recently shared research on two AI beneficiaries with its premium members. In a little-known semiconductor industry with outstanding EPS numbers. Click here for more information.
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I/O Fund Equity Analyst Damien Robbins contributed to this report.
