Tesla’s (TSLA) third-quarter (Q3) financials were not as bad as expected, sending its share price higher. The electric vehicle (EV) giant reported adjusted earnings of $0.72 per share, significantly surpassing analysts' expectations of $0.58. However, revenue for the quarter came in at $25.18 billion, slightly missing the forecast of $25.37 billion.
Despite this mixed performance, Tesla stock is up more than 14% in premarket trading today. This spike reflects management’s optimistic outlook on production and delivery volumes, visibility over the launch of a lower-cost EV, and substantial improvement in Tesla’s Full Self-Driving (FSD) take rate.
With this background, let’s examine Tesla’s Q3 earnings report more closely, and explore the key insights that investors should consider before making any investment decisions.
Key Takeaways from Tesla’s Q3 Earnings Report
- Lower ASPs Boost Vehicle Volumes – Tesla’s total automotive revenues were $20.02 billion, up both sequentially and year-on-year. This growth came despite a very challenging automotive environment. The company delivered record Q3 volumes led by growth in vehicle deliveries both sequentially and year-on-year. Tesla also recorded solid regulatory credit revenues in Q3. While the company’s volumes improved, the unit volume growth resulted from reduced average selling prices (ASPs). The price reductions reflected attractive financing incentives that helped boost demand. Tesla's strategy is to increase sales volume while keeping inventory levels low. To support this, the company is offering highly competitive vehicle financing options across all markets, which is impacting its overall revenue. On a positive note, Tesla also introduced new features like FSD for the Cybertruck and “Actually Smart Summon,” which generated $326 million in revenue for the quarter. Further, Tesla expects modest growth in vehicle deliveries in 2024.
- Margins Improved, But Sustainability is a Concern – The key highlight of Q3 was the automotive margins, which improved quarter-over-quarter. An increase in its overall production and delivery volume and more localized shipping that reduced freight and duties supported its margins. Notably, Tesla’s cost of goods sold (COGS) per vehicle hit a record low of around $35,100, a positive development for the company. The lower COGS, along with increased vehicle deliveries, reduced raw material costs, and stronger performance in Energy Generation, Storage, and Services, helped boost Tesla’s operating margin to 10.8%—a 323 basis point improvement compared to last year. Moreover, higher revenues from FSD and regulatory credits also contributed to this margin growth. While Tesla’s margins improved, the sustainability of this momentum is a challenge. While the lower COGS will support margins, the challenging economic environment and Tesla’s focus on offering discounts to drive sales could strain profitability. Tesla has indicated that its vehicle deliveries will grow in 2024, suggesting that the company may continue to reduce prices in the coming months, which could put further pressure on its margins.
- Tesla's Affordable EVs Are Coming in 2025 – Tesla CEO Elon Musk confirmed the launch of a more affordable EV by the first half of 2025. Musk is optimistic about the impact of this model on Tesla's deliveries. Musk expects the model to drive significant growth, with vehicle deliveries projected to rise by 20% to 30% next year. However, despite the excitement around this lower-cost EV, the broader trends in the electric vehicle market have been soft, which could present challenges to Tesla in meeting these ambitious targets.
- Energy Business Shines Bright – While Tesla faces some uncertainty in the EV market, its energy storage business is thriving. In Q3, the energy division posted a record gross margin of 30.5%, a notable improvement despite a decrease in Megapack volumes. Tesla’s Powerwall also had another quarter of record deployments, marking the second consecutive quarter of growth. With energy storage and other services becoming more profitable, Tesla expects continued growth in these areas. As the company expands its energy storage products and vehicle fleet, it is poised for long-term profit growth.
The Bottom Line on Tesla Stock After Earnings
Tesla's Q3 report offers some promising developments. The company has seen improvements in its automotive margins, a rise in the FSD take rate, visibility over the launch of a more affordable EV, and strong profits from its energy business. Additionally, vehicle deliveries are expected to improve in Q4, and Tesla is forecasting a 20%-30% growth in vehicles in 2025.
However, there are challenges ahead. Competitive headwinds and price cuts could continue to impact Tesla’s margins. While the company plans to launch more affordable vehicles in the first half of 2025, Elon Musk has dismissed the idea of a $25,000 EV. Further, the rollout of fully unsupervised FSD could face regulatory hurdles.
From a valuation perspective, Tesla's stock remains expensive, trading at a high 84.8 times its projected 2025 earnings of $2.52 per share.
As a result, Wall Street remains split about Tesla stock, maintaining a “Hold” consensus rating.
