Tesla’s Q3 Earnings in Review

(Sheila Fitzgerald)
(Sheila Fitzgerald)
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Tesla reported Q3 earnings that beat top and bottom-line estimates yesterday. The stock fell in after-hours trading. Today, we go through Tesla’s results.

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Overview

Everyone reading this should know about Tesla – the EV and clean energy company run by the eccentric CEO, Elon Musk. For more background on Tesla and the company’s current and future initiatives, check out our YouTube video Breaking Down Tesla’s Business.

For those that need a quick refresher…

  • Tesla (TSLA) designs, develops, manufacturers, sells and leases fully electric vehicles and energy generation and storage systems. It also offers services related to the sustainable energy products.
  • Tesla products are generally sold directly to customers, including through the Tesla website and retail locations.
  • The company’s mission is to accelerate the world’s transition to sustainable energy.

Q2 Earnings Highlights

  • For the quarter, Tesla delivered 241,391 vehicles. This was nearly 20% higher than the previous quarter and nearly 73% more than last year’s third-quarter.
  • Tesla’s revenue for the quarter was up 57% YoY to $13.76 billion beating the street estimates of $13.63 billion.
    • Growth was primarily achieved by automotive revenues which were up 58% YoY.
    • Auto revenue makes up 87.6% of total revenue.
  • The automotive segment reached 30.5% gross margins, up from 28.4% in the previous quarter.
    • Excluding regulatory credits, gross margins for the quarter were just under 29%
  • Operating income improved to $2.00 billion for the quarter (14.6% margin).
  • Adjusted EBITDA topped $3.20 billion for the quarter (23.3% margin).
  • GAAP net income came in at $1.62 billion, the second time it has passed $1 billion for a quarter.
  • Adjusted EPS of $1.86 beat estimates of $1.59 for the quarter.

Other Notes

  • Tesla is not yet recognizing additional revenue from the full self-driving (FSD) beta program.
  • The company continues to benefit from the marginal profitability of each incremental unit with higher fixed cost absorption.
  • Tesla has been able to retire high-interest-rate debt, including the early settlement of its 2025 senior notes of $1.8 billion during the quarter.
  • Tesla still has $1.26 billion of bitcoin on the balance sheet as of quarter-end.

Outlook

  • Volume: Tesla is focused on growing its manufacturing capacity as quickly as possible. Over a multi-year horizon, the company expects to achieve 50% average annual growth in vehicle deliveries.
  • Cash: Tesla says they have sufficienty liquidity to fund its product roadmap and expansion plans.
  • Profit: The company expects operating margin to continue to grow over time.
  • Products: Tesla targets Model Y production in Berlin and Austin before the end of the year.

Management Commentary

Zachary Kirkhorn, Master of Coin & CFO

  • On Production: “We were also able to achieve an annualized production run rate of over 1 million cars toward the end of the quarter.”
  • On Supply Chain Constraints: “Due to part shortages and logistics variability, we have not been able to run our factories at full capacity. It’s important to note that while we have roughly doubled deliveries year-to-date, this has been exceptionally difficult to achieve.”
  • On Wait Times: “Despite these increases in production and generally higher prices, our backlogs are continuing to grow and average customer wait times are extending. The only practical way to address this in the immediate term is to do everything we can to build more cars on our existing production lines, which is where we are focused.”
  • On FSD Regulation: “I think at a macro level here, what we’re seeing — and this is entirely understandable and expected, is that the automotive industry is going through a transition from the traditional car as we know it to more of a computer, software-oriented, sensor suites around them that can manage things beyond just what the driver manages. And regulatory bodies are — understandably so, are interested in understanding how to regulate in this environment, and NHTSA is no exception to that … I think this is a great thing. We’re excited to partner and we’ll work collaboratively with all regulatory bodies who want — to go on the journey to the transition to a software-oriented vehicle.”

Valuation

  • At yesterday’s closing stock price of $865.80, TSLA is trading at a $864 billion market cap.
  • Taking into account the company’s balance sheet, TSLA is trading ~$856 billion enterprise value (before taking into account dilution).
  • At this valuation, TSLA is trading ~13x forward sales and ~65x forward adjusted EBITDA.
  • For our detailed valuation breakdown, take a look at our YouTube video COMPLETE Tesla Model + DCF Valuation. Nothing in this quarter’s results materially impact the valuation calculation from the video.

More Tesla Content

Breaking Down Tesla’s Business | 2021 TSLA Primer


COMPLETE Tesla Model + DCF Valuation


DCF download available for ROIC members here.

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