Tesla margins rebound, but it doesn’t seem to be because of AI

Tesla’s Q3 performance shows signs of recovery: The electric vehicle giant’s latest financial results indicate a potential turnaround in profitability despite ongoing challenges in the automotive market.

• Tesla reported delivery growth of 6.4% year-over-year and 4.3% quarter-over-quarter, reaching 462,890 vehicles in Q3 2024.
• However, automotive revenue growth lagged behind delivery growth, increasing by only 1.3% year-over-year due to declining average selling prices (ASPs).
• The company’s overall revenue of $25.18 billion fell short of analyst expectations by nearly half a billion dollars.

Margin improvement drives optimism: Despite lower ASPs, Tesla managed to boost its profitability through significant cost optimizations and production efficiencies.

• Automotive gross margin expanded by approximately 240 basis points quarter-over-quarter and 72 basis points year-over-year.
• The average gross profit per vehicle increased by 16.3% compared to the previous quarter, reaching $6,886.
• Operating margin rebounded to 10.8% in Q3, up from 6.3% in Q2 and 5.5% in Q1, instilling more confidence in the company’s margin recovery story.

Production costs reach record lows: Tesla’s ability to reduce manufacturing expenses played a crucial role in offsetting the impact of lower selling prices.

• The company achieved a record low production cost of approximately $35,106 per vehicle, a 4.6% decrease from the previous quarter.
• This cost reduction allowed Tesla to manufacture and sell 14,000 more vehicles in Q3 for about $220 million less than in Q2.

Challenges in sustaining margin growth: While Q3 showed promising results, Tesla’s management cautioned about potential difficulties in maintaining these margins in the upcoming quarter.

• CFO Vaibhav Taneja warned that sustaining Q3 margins in Q4 would be challenging due to the current economic environment and vehicle affordability issues.
• The company’s focus on offering competitive financing options and maintaining affordability may continue to pressure margins in the near term.

Future growth targets and product developments: Tesla remains ambitious in its growth plans despite the current market challenges.

• CEO Elon Musk stated that the company is aiming for 20% to 30% vehicle growth in 2025, targeting at least 2.1 million vehicle deliveries.
• Tesla plans to introduce more affordable models starting in the first half of 2025, though this may result in less cost reduction than previously expected.
• The company’s highly anticipated robotaxi, now called Cybercab, is expected to enter production in 2026 or 2027, with a target of at least 2 million units per year.

Energy storage segment shows promise: Tesla’s energy business demonstrated strong performance in Q3, contributing to overall margin improvement.

• Despite a sequential decline in deployments and revenue, the energy storage segment’s gross margin expanded from 24.5% to 30.5%.
• This growth in the energy storage business helped boost Tesla’s company-wide gross margin to 19.8% in Q3, up from 18.0% in Q2.

The AI potential versus current realities: While Tesla is often viewed as a leader in artificial intelligence, the company’s stock performance remains closely tied to its automotive margins rather than its AI capabilities.

• The promise of recurring software revenue from robotaxis and humanoid robotics represents a significant long-term opportunity for Tesla.
• However, the repeated delays in launching fully autonomous vehicles and robotaxis have shifted investor focus back to the company’s core automotive business performance.
• Until Tesla can demonstrate tangible AI-driven revenue streams, margin improvements and vehicle production efficiencies are likely to remain the primary drivers of the company’s stock price in the near term.