"Pie King" Tesla has finally made a triumphant return!

$Tesla(TSLA.US) released its Q3 2024 earnings report after the U.S. market closed on October 23 Beijing time. Here are the key takeaways:

1. Lower vehicle ASP dragged overall revenue below expectations, but it's not a big deal: Automotive revenue this quarter was $20 billion, $500 million below market expectations. However, regulatory credit revenue exceeded expectations by $200 million, so the actual automotive revenue (excluding credits) was about $700 million below expectations, mainly due to lower-than-expected ASP, which declined by $730 sequentially.

2. The positive surprise was automotive gross margin finally rebounding, significantly beating expectations: Despite continued ASP declines, automotive gross margin (excluding credits) improved by 2.4% QoQ to 17.1%, well above buy-side expectations of 15.3% and sell-side expectations of 15.7%, primarily due to lower variable costs.

3. Tight cost control drove operating profit higher: While automotive gross margin boosted overall profitability, operating expenses continued to decline (likely due to Q2 layoffs reducing payroll costs). With fewer restructuring charges in Q3 (down $52 million QoQ, as layoffs were concentrated in Q2), operating profit rose to $2.7 billion, beating the $2.2 billion consensus.

4. The next "growth engine" is coming: With Model 3/Y aging and competition intensifying, Tesla lacks pricing power and must rely on cost cuts to maintain margins. However, the company announced its next-gen affordable model will enter production in H1 2025. Elon Musk expects 20%-30% volume growth next year, providing a new valuation catalyst.

Dolphin Research's view:

In our earnings preview, we noted being more optimistic about Tesla's 2025 outlook versus last year's 2024 expectations. Beyond long-term AI narratives, the core auto business is improving. A potential Trump presidency could also smooth AI adoption.

1) 2025 guidance unveiled early: Musk pre-announced a "Model 2.5" - a stripped-down, cost-optimized variant bridging Model 3 and the true affordable Model 2 - for H1 2025 production. This drives Tesla's 30% volume growth target for 2025 (~360k-550k incremental units vs. ~1.8M 2024E), well above the ~250k consensus increment.

2) Cost cuts shine: The auto gross margin beat (~2%) was massive. While Q4 guidance appears conservative (management hinted at ~510k deliveries vs. <500k consensus), our analysis suggests sustainability from: a) Renegotiated material contracts (battery cost reductions?); b) Cybertruck GM turning positive.

With Model 3/Y lacking pricing power, Tesla squeezed variable costs to lift margins. These two factors drove the earnings beat.

AI narratives persist: FSD V13 will require 5-6x fewer interventions vs. V12.5, with unsupervised FSD expanding in California/Texas. However, we view these as call options contingent on a Trump victory.

We previously hoped for sub-$200 entry points amid Q3 margin normalization, but the strong beat makes that unlikely now. Investors may need to wait for Q1 seasonal weakness.

Detailed analysis:

1. Tesla: Revenue slightly missed but gross margin crushed

1.1 Revenue miss driven by autos

Q3 revenue grew 7.8% YoY to $25.2B (-1.2% vs. $25.5B consensus). Despite higher deliveries, automotive revenue of $20B missed ($20.5B consensus). Excluding $740M credits (above $530M expected), auto sales were $18.8B vs. $19.5B expected due to ASP declines.

Energy revenue also missed as storage deployments fell 27% QoQ to 6.9GWh.

1.2 Auto gross margin surprise lifted overall profitability

Auto gross margin rebounded to 20.1% (vs. 17.9% consensus). Energy margin hit 30.5% (vs. 24.5% expected) on product mix and lower lithium prices. Services margin rose to 8.8% (vs. 5.8% expected) on charging network expansion.

1.3 Auto margin analysis

Ex-credit auto gross margin improved 240bps QoQ to 17.1%, beating buy-side (15.3%) and sell-side (15.7%) estimates.

2. Unit economics: Cost cuts drove the beat

Auto ASP (ex-credits/leasing) fell $730 QoQ to ~$42k due to: a) Q2 price cuts' full-quarter impact; b) Model 3 mix up 2%; c) U.S. loan incentives ($5k/unit in Q3 vs. $6k-$8k in Q2).

Variable costs dropped ~$1.7k/unit from: a) Renegotiated material contracts; b) Cybertruck GM improvement; c) Lower freight/tariffs. This offset ASP declines.

Regulatory credits were $740M (above $530M expected) as U.S. EV adoption remains slow.

3. Next growth engine

With Model 3/Y aging, Tesla's market share is declining globally. The affordable model (2025H1 production) could add 360k-540k units in 2025 (20%-30% growth vs. flat legacy models).

FSD V13 will require 5-6x fewer interventions. Capex hit $3.5B (+55% QoQ) on GPU purchases (50k H100 chips by October).

Free cash flow improved on margin expansion and cost cuts. Inventory days were stable.

4. Cost discipline

R&D ($1.04B vs. $1.1B expected) and SG&A ($1.19B vs. $1.3B expected) were below consensus due to Q2 layoffs. Operating profit reached $2.7B (vs. $2.2B expected).

5. Energy & Services

Energy revenue missed ($2.4B vs. $2.65B expected) on lower storage deployments (6.9GWh, -27% QoQ), but mix and lithium prices boosted margins to 30.5% (vs. 24.5% expected).

Services revenue grew 29% to $2.8B, with margins up to 8.8% (vs. 5.8% expected) on charging network expansion.