"The Pie King" Tesla has finally returned as the king!

Tesla (TSLA.O) released its third-quarter report for 2024 after the U.S. stock market closed on the morning of October 23rd Beijing time. Let's look at the key information:

1. Car unit price has declined slightly, leading to overall revenue below market expectations, but not a big issue: This quarter's automotive revenue was 20 billion, 5 billion lower than market expectations. However, as regulatory credit revenue exceeded market expectations by 2 billion this quarter, the actual automotive revenue (excluding regulatory credits) was about 7 billion lower than market expectations. This was mainly due to the lower unit price, with the car unit price decreasing by $730 compared to the previous quarter.

2. What exceeded expectations this quarter is that the automotive gross margin finally rebounded significantly, far exceeding market expectations: Despite the continuing decline in automotive unit price, this quarter's automotive gross margin (excluding the impact of carbon credits) actually increased by 2.4% to 17.1% compared to the previous quarter. This significantly surpassed the buyer's expectation of 15.3% and the seller's expectation of 15.7%, mainly due to the decrease in variable costs.

3. Strict control over operating expenses, leading to a slight increase in operating profit margin: While the improvement in automotive gross margin drove the overall gross margin significantly above expectations, operating expenses continued to decrease (possibly related to the decrease in personnel expenses due to layoffs in the second quarter). Additionally, this quarter saw a reduction in restructuring expenses related to layoffs (a decrease of 520 million compared to the previous quarter, with layoffs mainly concentrated in the second quarter), leading to an increase in overall operating profit to 2.7 billion this quarter, exceeding the market expectation of 2.2 billion.

4. The next "growth engine" is about to arrive: With the Model 3/Y facing aging models and intensified competition, the logic for price increases is basically absent. Tesla can only stabilize profit margins by continuously reducing costs. However, to the surprise of investors, Tesla announced that a new generation of affordable models will begin production in the first half of 2025. With this new car driving growth, Musk expects vehicle growth to reach 20%-30% next year, providing a new growth engine for the automotive valuation.

Dolphin's overall view:

In the Tesla performance outlook last night, Dolphin mentioned that looking ahead to 2025 for Tesla from 2024, I am much more optimistic compared to looking ahead to 2024 from the end of last year. Setting aside the long-term AI story, the hardware underlying the monetization of AI—automotive business—is improving. Moreover, in case Trump takes office, the landing expectations for the AI story will also be smoother.

Early release of the 2025 guidance: In terms of the automotive business, before the truly affordable Model 2 comes out in 2025, between Model 3 and Model 2, there will be a Model 2.5 focused on simple cost reduction and cost control—similar to the model announced for production in the first half of 2025 in this financial report—Musk has already announced this!Moreover, for this reason, its sales outlook for 2025 is to grow by 30%, which means selling around 1.8 million vehicles next year compared to this year, selling approximately 360,000 to 550,000 more vehicles, rather than the market's expected additional 250,000 vehicles, so the guidance is quite positive.
If the technical cost reduction cannot be achieved, is it also starting to squeeze the supply chain? If we say that the guidance is a big beat, another heavyweight positive news this time is the ultra-high gross profit margin in the automotive business. The Dolphin previously mentioned that the gross profit margin would be a significant wild card this time, and the result of playing this card, with a beat of around 2 percentage points for the automotive business, is definitely a strong and effective beat.

Although the company hinted at sales of 510,000 vehicles in the fourth quarter (market expectations are basically below 500,000), even with a relatively conservative guidance on the automotive gross profit margin for the fourth quarter (saying that it is relatively difficult to maintain the high gross profit margin of the third quarter), the magnitude of this beat itself, from the Dolphin's retrospective analysis, still has a certain degree of sustainability:

a. Tesla's renegotiation of raw material procurement contracts fully reflected in the third quarter, resulting in cost reduction driven by lower raw material costs (is there a possibility that suppliers such as CATL reduced prices for Tesla?).

b. The increase in Cybertruck's gross profit margin, achieving positive gross profit for the first time;

In this way, in the situation where the Model 3/Y is facing aging and intensified competition leading to no increase in unit price, Tesla has managed to increase its profit margin by compressing unit variable costs.

The above two points constitute the core source of Tesla's significantly exceeding expectations!

Of course, the big pie of AI is still being drawn: next, FSD V13 will increase the interval monitoring mileage by 5-6 times compared to V12.5, and unsupervised FSD will also be implemented in California and Texas, etc. However, the Dolphin sees these more as linked to Trump's re-election, just as optimistic upward options.

Originally, the Dolphin hoped that a flat gross profit margin in the third quarter would push Tesla to a relatively comfortable entry price below $200, after all, sales in the fourth quarter are guaranteed, there is new car stimulation in 2025, and the upward factors outweigh the downward factors. But now it seems a bit difficult to reach the $200 price, can only wait to see if there will be a repeat of the significant sales slump at the beginning of this year during the slow season of the first quarter.

Below is a detailed analysis of the financial report:

I. Tesla: Revenue slightly below market expectations, but gross profit margin significantly exceeds expectations!

1.1 Revenue slightly below market expectations, mainly due to slightly lower than expected car sales revenue

In the third quarter of 2024, Tesla's revenue was $25.2 billion, an increase of nearly 7.8% year-on-year, slightly below expectations. The total revenue of $25.2 billion performed slightly below the Bloomberg's consensus expectation of $25.5 billion, when the total revenue continued to grow quarter-on-quarter with the increase in car deliveries, the revenue side actually declined compared to the previous quarter.

In fact, the reason for the decline was in the most critical automotive business, with revenue of only $20 billion this quarter, lower than the market's consensus expectation of $20.5 billion. Although the car business still had carbon credit income to save it this quarter, due to the quarter-on-quarter decline in car unit prices, automotive sales (excluding carbon credits) were only $18.8 billion this quarter, lower than the market's expected $19.5 billionBesides the automotive business, the revenue side of the energy business this quarter was slightly below market expectations, mainly due to the lower-than-expected energy storage shipments this quarter, with energy storage shipments of 6.9GWH, a decrease of 27% compared to the previous quarter.

1.2 However, the gross profit margin of the car sales business greatly exceeded expectations, driving the overall gross profit margin to be higher than market expectations

In every performance report, the automotive gross profit margin performance has always been more significant than revenue, and the real incremental information during financial reporting. This quarter, the gross profit margin of the automotive business finally rebounded from the bottom in the second quarter, reaching an overall automotive business gross profit margin of 20.1%, significantly exceeding the market's expected 17.9%! This drove the overall gross profit margin to exceed expectations.

In other businesses, although the energy storage business saw a slight decrease in shipments compared to the previous quarter, the gross profit margin increased to 30.5% on a quarter-on-quarter basis due to the increase in unit prices (possibly due to a higher proportion of high-priced Powerwall) and the continuous decline in lithium prices, surpassing the market's expected 24.5%.

As for the service business, due to the continued expansion of the supercharging network in North America (covering non-Tesla users), as well as the improvement in service center and accessory sales gross profit margins, the gross profit margin also increased to 8.8% on a quarter-on-quarter basis, exceeding the market's expected 5.8%.

1.3 Automotive gross profit margin significantly exceeds market expectations

As the most important observation indicator for each quarter, the automotive gross profit margin is crucial, especially in the current situation of declining sales and intensified competition. In order to clearly understand the true situation of the automotive gross profit margin, Dolphin Jun has separately analyzed the carbon removal credit automotive sales gross profit margin, automotive leasing gross profit margin, and the overall automotive business gross profit margin.

Since the volume of the automotive leasing business is small and the gross profit margin is stable, and the overall automotive gross profit margin is a comprehensive result of the two, such detailed analysis is mainly to observe the carbon removal credit automotive sales gross profit margin.

The third-quarter automotive sales gross profit margin (carbon removal credit and leasing) was 17.1%, an increase of 2.4 percentage points compared to the previous quarter, finally rebounding from the lowest point in the second quarter! This significantly exceeded the buyer's expected 15.3% and the seller's expected 15.7% that Dolphin Jun has seen so far!

Therefore, the key question here is, why can Tesla's automotive gross profit margin rebound from the low point this quarter and exceed market expectations by so much?2. Single-car Economy: The reason for the higher-than-expected gross margin is the significant decline in single-car cost!

Let's first look at the selling price end. In the third quarter, Tesla's revenue per car sold (excluding carbon credits and car rental sales) was $42,000, a decrease of about $730 compared to the previous quarter, lower than market expectations.

The reason why the market had higher expectations for the car business unit price is that in the third quarter, in terms of price adjustments for the main models Model 3/Y, Tesla did not reduce prices in China and the United States. In Europe, due to the imposition of tariffs (only 9% imposed), the price of Model 3 was increased by 1500 euros.

Dolphin believes that the reason for the $730 decrease in unit price this quarter may mainly be due to the following reasons:

a. The impact of the price reduction in the second quarter did not cover the entire quarter, but it had an impact on the entire third quarter (the average price reduction of the main models is about 1% - considering the weighted price due to time factors);

b. Model structure impact: The proportion of lower-priced Model 3 in the model structure increased by 2 percentage points compared to the previous quarter;

c. Incentive measures impact: Tesla provided low-interest loans throughout the entire third quarter in the United States, but it only covered a few weeks in the second quarter; (Starting in May, offering 0.99% low-interest loans for Model Y, covering only 3 weeks, which translates to a subsidy of $6000-8000 per Model Y. In the third quarter, although providing 1.99% low-interest loans for Model Y, combined with the interest rate reduction impact, the subsidy cost per Model Y is about $5000, covering the entire third quarter)

In China, although Tesla also provided a 5-year interest-free loan with no down payment, this offer was also available in the second quarter, so there was basically no change marginally.

After discussing the bicycle price, let's talk about the bicycle cost. Generally speaking, Tesla's cost reduction comes from four dimensions - 1) dilution of scale due to sales volume release and full utilization of production capacity; 2) cost reduction in technology; 3) natural cost reduction of battery raw materials; 4) government subsidies, as follows:

2.1 Significant decrease in variable cost per bicycle

When breaking down the bicycle cost into bicycle depreciation and variable cost per bicycle, the economic account for the third quarter is as follows:

1) Bicycle depreciation effect: Although the sales volume in the third quarter increased by 4%, the absolute value of bicycle depreciation basically remained the same as the previous quarter, and the bicycle depreciation rate slightly increased due to the decrease in unit price.

It is believed that this may be mainly due to the fact that most of the sales contribution in this quarter came from the Shanghai factory (driving the improvement of production capacity utilization), while the production and sales from European and American factories declined this quarter (resulting in a decrease in production capacity utilization), ultimately offsetting each other.

2) Variable cost per bicycle: The variable cost per bicycle in the third quarter was $32,000, a decrease of approximately $1,700 compared to the previous quarter, becoming the main reason for the increase in the gross profit margin of the automotive business this quarter (excluding carbon credits). The decrease in variable cost per bicycle may be mainly attributed to:

a. The impact of Tesla's renegotiation of raw material procurement contracts fully reflected in the third quarter, leading to cost reduction driven by lower material costs (especially in the battery cost reduction);

b. Improvement in Cybertruck gross margin, achieving positive gross profit for the first time;

c. Others: Freight, tariffs, and other one-time costs have decreased.

3) Automotive gross profit margin continues to rise: In the end, although the price per bicycle continued to decline this quarter, the significant cost reduction in this quarter drove the automotive business gross profit margin to exceed expectations.

The regulatory credits totaled 740 million this quarter, a slight decrease from the previous quarter, but still exceeded the market's expectation of 530 million. Although the sustainability of carbon credits is weak due to the accelerated transformation of new energy in North America, the penetration rate of new energy vehicles in the United States is still slow, and the demand for regulatory credits will continue for some time.

2.3 Is Tesla's next growth engine coming?

From the perspective of car manufacturing fundamentals, due to the aging of the Model 3/Y models, although Tesla's overall sales volume and market share will fluctuate with the seasonal cycle of car sales (usually the third and fourth quarters are the peak seasons for car sales) and adjustments in price/incentive measures, looking at a longer time horizon, Tesla's overall market share in different regions has shown a downward trend. Without the stimulus of new models, if the car manufacturing fundamentals continue to deteriorate, it is only a matter of time, and Tesla urgently needs the next growth engine

Currently, the market's consensus expectation for Tesla's car sales in 2024 is around 1.79 million, slightly lower than the 1.81 million in 2023. The implied delivery volume of 1.79 million vehicles in the fourth quarter is close to 500,000. With the boost from the peak season for car sales in the fourth quarter, it is expected that the completion difficulty is not too great. However, it is difficult for Tesla to increase unit prices further, so it can only stabilize profit margins by continuously reducing costs. It is still uncertain whether the profit margin in the fourth quarter can be maintained.

At the same time, without the stimulus of new cars, it can be foreseen that 2025 will still be a challenging year for Tesla's car sales. The penetration rate of new energy vehicles in Europe and the United States is still unlikely to see significant improvement. With the aging of the Model 3/Y models and facing intensified market competition, it is expected that Tesla's global market share and profit margin will continue to decline.

Fortunately, in the information disclosed during this earnings call, Tesla finally provided the delivery time for the next generation of affordable models and the sales expectations for 2025. The new generation of affordable models will start production in the first half of 2025, initially using the current production lines (Tesla's current maximum capacity is about 3 million vehicles). With the introduction of this new car, Musk expects vehicle growth next year to reach 20%-30%, implying a total sales volume of 2.16 million to 2.34 million in 2025. Assuming that the total sales volume of the current models remains the same next year, this new generation of models is expected to bring about an increase of approximately 360,000 to 540,000 vehicles, providing a new growth engine for the valuation of the automotive business.

As for the progress of Full Self-Driving (FSD) that investors are still concerned about, the key to increasing FSD penetration lies in price adjustments and safety improvements. In terms of safety, Musk stated that compared to version 12.5, the intervention mileage of FSD V13 will increase by 5-6 times. However, in terms of the hardware training power of FSD, there are no constraints on the hardware side due to the increase in deployed GPUs (an estimated 50,000 H100 chips by the end of October).

It is expected that due to Tesla's investment in hardware computing power (purchasing H100 GPU chips), this quarter's capital expenditure has also reached a new high, increasing by 55% quarter-on-quarter to $3.5 billion. Tesla expects annual capital expenditures to exceed $11 billion, implying capital expenditures of around $2.4 billion in the fourth quarter, which is basically within a controllable range.

The improvement in free cash flow this quarter is mainly due to the increase in gross profit margin and the reduction in expenses, leading to an operating profit increase of $1.1 billion compared to the previous quarter. Although the production-sales difference in inventory this quarter only increased by 6,900 vehicles, the inventory turnover days remained basically the same compared to the previous quarter, indicating that inventory backlog issues are not severe and have little impact on free cash flow

3. Expenditure End: Operation Costs Under Strict Control

In addition to being more cautious about investing in car production capacity, Tesla's research and development expenses and sales expenses were tightly controlled this quarter. R&D expenses this quarter were 1.04 billion, lower than the market's expected 1.1 billion, while sales and administrative expenses this quarter were only 1.19 billion, lower than the market's expected 1.3 billion. Overall expenses were lower than market expectations, possibly mainly due to the reduction in personnel caused by layoffs in the second quarter, leading to a decrease in operating expenses.

With the improvement in gross margin and the reduction in operating expenses, as well as the reduction in restructuring expenses related to layoffs (a decrease of 520 million compared to the previous quarter, with layoffs mainly concentrated in the second quarter), the overall operating profit this quarter increased to 2.7 billion, exceeding the market's expected 2.2 billion.

4. Energy Growth Slows Down, Service Business Progresses Normally

4.1 Slowdown in Energy Business Growth: Tesla's energy storage and solar business include selling solar systems and energy storage systems to residential customers (to C), small commercial and large commercial customers (to B), and utility-level customers.

In the third quarter of this year, revenue reached 2.4 billion US dollars, lower than the market's expected 2.65 billion US dollars, mainly due to a slight decline in energy storage shipments this quarter. Energy storage shipments were only 6.9 GWH this quarter, a 27% decrease compared to the previous quarter's 9.4 GWH. However, energy storage projects are project-based, with significant seasonal fluctuations, and the demand for large-scale storage in the United States remains strong. Therefore, Dolphin is not worried about the slowdown in growth in this business this quarter. Tesla also expects that by the fourth quarter of 2024, the installed capacity of the energy storage business will continue to grow on a quarter-on-quarter basis, with annual shipments expected to double year-on-year. This means that the energy storage shipments in the fourth quarter may return to around 9 GWH, and this business is still on an upward trajectory.

Furthermore, the energy storage business involves signing contracts in advance to lock in prices. Due to the current low lithium prices, and possibly a higher proportion of higher-priced Powerwall products in the product mix this quarter, the energy business's gross margin reached a new high of 30.5%, significantly exceeding the market's expected 24.5%.

4.2. Normal Progress of Service Business

In the third quarter, Tesla achieved a service business revenue of $2.8 billion, a year-on-year increase of 29%, which is basically in a steady progress state. The gross profit margin also increased to 8.8% on a quarter-on-quarter basis, exceeding the market's expectation of 5.8%, driven by the continued expansion of the supercharging network in North America (covering non-Tesla users), as well as the improvement in gross profit margin of service centers and parts sales.

For historical articles by Dolphin Jun, please refer to:

Interpretation of the Financial Report on July 24, 2024: "Tesla: 'AI Pie' Sounds Good, but Reality is Too Tough"

Earnings Call on July 24, 2024: "Expected Capital Expenditure to Exceed $10 Billion for the Year, Will Continue to Strengthen Investment in AI Chips"

Interpretation of the Financial Report on April 24, 2024: "FSD Makes a Significant Contribution, Who Still Says Tesla is 'Paper Mache'?"

Earnings Call on April 24, 2024: "Will the Next Generation Model 2 Be Released Early?"2024年1月25日财报解读"Tesla without the AI facade: the endless prices, the unstoppable bleeding" link

2024年1月25日财报电话会"Tesla Q4 minutes: 24-year sales volume is not "50%", but expenses are still on the rise" link

2023年12月1日热评 "Tesla Cybertruck: high pricing, low economy" link

2023年10月19日财报解读 "Killing the bubble moment! Tesla, the reality is very tough" link

2023年10月19日财报电话会 "CT climbs slowly, slow factory construction in Mexico, Musk has bankruptcy "phobia"" link

2023年10月12日深度 "FSD autonomous driving: cannot support Tesla's next valuation miracle" linkOn September 22, 2023, in-depth analysis "The Lion King meets the Wolf Pack, can Tesla "keep an eye on home"?"

On September 19, 2023, in-depth analysis "Tesla: How far is Musk's "trillion-dollar empire dream"?"

On September 1, 2023, hot review "New Model 3 goes on sale, prices rise instead of fall?"

On July 20, 2023, financial report interpretation "[Trillion-dollar Tesla, only die-hard fans dare to embrace]" ](https://longportapp.cn/zh-CN/topics/8325917)

On July 20, 2023, financial report conference call "[Tesla minutes: Gross margin breached, Tesla may continue to lower prices]" ](https://longportapp.cn/zh-CN/topics/8332590?app_id=longbridge)

On April 20, 2023, financial report interpretation "[Tesla: Big year on paper, small year in reality, "long-term companionship" is too difficult]" ](https://longportapp.com/zh-CN/topics/5281637?app_id=longbridge)

On April 20, 2023, financial report conference call "[Tesla: Confidently selling cars at zero profit, harvesting with autonomous driving]" ](https://longportapp.com/zh-CN/topics/5306981?app_id=longbridge&channel=t5306981&invite-code=276530)

On January 26, 2023, financial report interpretation "[Tesla's story reshaped, the moment of testing faith has arrived!]" ](https://longportapp.com/zh-CN/topics/3886866?app_id=longbridge&channel=t3886866&invite-code=276530)

On January 26, 2023, conference call "[Tesla minutes: "No rivals even with a telescope for autonomous driving, the second Tesla may be in China"]" ](https://longportapp.com/zh-CN/topics/3887318?app_id=longbridge&channel=t3887318&invite-code=276530)2022 Financial Report Interpretation on October 20th: "Critical Question: How to Maintain Bicycle Profitability When Demand is Insufficient?"

October 20th Conference Call: "Minutes: 'Internal Combustion Engine Cars Are Doomed, No Production Cuts Anytime'"

July 21st, 2022 Financial Report Interpretation: "Without the Shanghai Factory's Lifeline, What Can Tesla Rely On?"

July 21st, 2022 Conference Call: "Musk: Raising Prices Repeatedly, I'm Unfazed"

June 6th, 2022 Opinion Update: "Stock Market Tremors, Were Apple, Tesla, and Nvidia Wrongly Judged?"

April 21st, 2022: "New Energy Thundering, Tesla Continues to Soar"

April 21st, 2022: "New Factory Production Capacity Ramping Up, Tesla to Deliver 1.5 Million Vehicles in 2022 (Meeting Minutes)"

February 28th, 2022 Opinion Update: "Amid Scattered Sentiments, Safety Comes First in Investing in Tesla"

January 27th, 2022 Conference Call: "Tesla: Musk Reiterates the Importance and Value Potential of FSD (Conference Call Minutes)"

January 27th, 2022 Financial Report Review: "Tesla, the Unstoppable Force, Will Take a Midterm Break?"2021 December 6th Opinion Update: "Will Musk's Ticket Sales Tax Offset, Where Will Tesla's Stock Price Go?"

2021 October 21st Conference Call: "Tesla: Annual Sales of One Million Imminent, Will Musk Let Go?"

2021 October 21st Financial Report Review: "Tesla: Cathie Wood Shouts $3000, Is the Sky the Limit?"

2021 July 27th Conference Call: "Tesla Q3 2021 Earnings Conference Call Summary"