Tesla will report its third-quarter financials later today and the expectation is that the company will remain profitable, albeit with lower margins due to the incentives being pushed to sell cars.
This isn’t the end of the world and a bad quarter for Tesla would be an amazing quarter for almost any other electric car company. Tesla has long been one of the most profitable automakers in the world and will likely remain so for some time.
How does Tesla continue to thrive? Is Tesla up to some shenanigans? What’s the deal?
I’ll be honest, I didn’t think any of this was that surprising and maybe you won’t either. The answers seem a little obvious, but there’s a somewhat notable stock analyst on social media calling this into question right now so I thought I’d provide an answer should you ever be confronted by someone with a blue-checked account asking these questions.
1. There’s Only One Other Company In The World Like Tesla
Here’s the tweet below, if you were curious:
1/2 Can $TSLA's reported financials really be trusted? Why do I ask? Well, how is it possible that every publicly traded pure-play BEV company loses money making BEV cars (to include the ones that make cars exclusively in low-cost China), yet $TSLA is wildly profitable? pic.twitter.com/yQ8OkIeGdV
— Gordon Johnson (@GordonJohnson19) October 21, 2024
Other than the curious choice of using red to show profitability, there are a couple of red flags in this chart. First, note that it was produced by analyst Gordon Johnson’s firm GLJ RESEARCH and cites “Bloomberg” as a source for public information about public companies. Having Bloomberg in there gives it more authority even though you don’t need a Terminal to access this info and Bloomberg probably had nothing to do with this.
Second, and more seriously, these are cherry-picked companies and the chart includes the on-the-ropes Farraday Future, the bankrupt Fisker, and the troubled Nikola. Curiously, by selecting “Pure BEV” stocks, Mr. Johnson excludes the one company that is comparable to Tesla, which is BYD. Last year BYD made $4.23 billion in net profits. The company does sell PHEVs and REVs, but it is primarily a battery/electric automaker and makes almost as many electric cars as Tesla does.
Tesla is not the only company in the world making profits on electric cars and GM also said it would likely reach variable profitability on electric cars later this year.
2. Tesla Had A Huge First-Mover Advantage
Whether intentionally or not, this graphic illustrates the biggest reason: Tesla had a huge first-mover advantage and was able to corner more than 80% of the market in the United States at the beginning of the EV boom.
Tesla is much older than these companies and was in full production of electric cars years before most of the competition was even founded. Rivian, for example, was started in 2009, six years after Tesla, and didn’t get its R1T out into the world until 2021, at which point the Model S had been on sale for almost a decade.
So Tesla has already been through the hard part and it was hard. Tesla didn’t turn a profit until Q1 of 2013, ten years into its existence. Comparing Tesla to a company like Xpeng, which was founded in 2014, is like wondering why your eight-year-old has trouble dunking when your 18-year-old seems to dunk with ease.
The advantages that being first gave Tesla are enormous. With the exception of Nissan, Tesla had almost no real competition for the first ten years of its existence, which meant it could charge high prices and negotiate with suppliers who couldn’t sell elsewhere. It also meant that it didn’t have to compete for customers or talent.
3. Tesla Figured Out How To Make Cars Inexpensively
Tesla is the most efficient producer of electric cars, having pioneered manufacturing techniques (like gigacasting) and found a lot of little ways to reduce costs. Every time Munro & Associates digs into a Tesla they find new ways Tesla saves money.
Just think about the Teslas you see on the road. There are very few obvious changes from year to year. The Tesla Model S has only had one real big update in its more than ten years on the market and even that one wasn’t huge. Under the skin, Tesla does more, but it’s less obvious.
With the addition of the Cybertruck, Tesla only makes five different vehicles: 3, Y, S, X, and Cybertruck. Compare that to a regular automaker like Mercedes, which makes a dozen models with multiple powertrains and options.
4. Tesla Can Win On Volume While Almost No One Else Can
Think about it this way. Imagine you live in a place where coffee shops didn’t exist. Now imagine that a person comes up with an idea for one that would sell fancy coffee and expensive caffeinated milkshakes called, oh, idk, Queequeg’s. It takes some time, but Queequeg’s does a great job of securing all its beans, its sugar, and winning over the loyalty of everyone in the town.
In a normal world, you’d expect one or two other companies to come in and start selling coffee. Even existing non-coffee restaurants might add similar drinks to their menus. But this isn’t a normal world and, instead, 200 new coffee shops all opened at the same time within a year.
Imagine the huge advantage you’d have if you had all the good baristas, all the name recognition, the best recipes, and a robust supply chain. Those other 200 coffee shops would be fighting for the same beans.
This is what happened in the car market. Not only did Tesla’s success encourage traditional OEMs to electrify their lineups, a quirk of Chinese industrial policy created a bunch of new companies basically overnight. For instance, China started this year with over 200 EV automakers.
If you want to see what this looks like in a chart, here’s one from Trading Economics showing the spot price of Lithium Carbonite, which is the chemical precursor necessary to make almost every modern electric car battery.
When every car company decided to get into the EV game there was suddenly a rush for battery materials, talent, equipment, chips, everything. By being there early, Tesla was able to build out its company when it was cheaper to do so.
Even though other companies understood some of Tesla’s ideas, by the time they were ready to implement them it was suddenly more expensive to do so.
5. Tesla Was Built For A Price War
All of this expansion in the EV space led to a brutal price war last year that put every other company on that list, and many companies not on that list, in a bad position.
By lowering prices, both BYD and Tesla forced its competitors to do the same. This meant that these young carmakers, early in the investment cycle, suddenly saw margins drop to the floor.
Using our coffee example, suppose that Queequeg’s sees the competition and uses its efficiency advantage to lower the cost of its Pumpkin Mocha from $3.00 to $2.25 because it only costs the shop $1.50 per order. If you’re a new upstart you may barely be able to make money at $3.00, which leaves you with the awful choice of either losing more money per order or losing volume because your product is so much more expensive.
6. Tesla Was Built On Carbon Credits
Tesla took advantage of a number of large government programs in order to survive its early years, though none perhaps as impactful as carbon credits. If you’re an automaker and you want to sell in certain markets, like California, you have to produce a certain number of efficient vehicles.
If you cannot, you can buy “carbon credits” from an automaker who does produce EVs. This is both a cost to traditional automakers and a boost for Tesla.
The company has made at least $9 billion this way since 2009 and, while that’s only a small percentage of total revenue, it’s almost all profit. Because automakers are making more EVs this credit should slowly diminish over time and no one else will be able to take advantage of it as Tesla has.
Tesla Is Hurting, Too
Here’s a chart from Statista that shows what’s happening quite well. Tesla continues to sell more cars and, at the same time, its gross automotive margins (the amount of profit it makes per vehicle) have dropped from a remarkable high of 29.1% to a far more traditional sub-15% in the last quarter.
This is what happens when there’s more competition, even in a market that’s getting (slowly) bigger. That huge margin drove everyone headfirst into the EV space and, while Tesla could survive it, the company also is struggling to rekindle some of that magic.
So, yeah, Tesla is extremely profitable. It’s also less profitable than it once was and has almost a decade of lead time on everyone else. This isn’t a trick, it’s just basic economics.
Top graphic: base image by Carl Banks; Tesla; YouTube
That Median electric car compay doesn’t look so bad, how did they do that with no press and no known car models?
Gross profit isn’t true profit per vehicle, its revenue less COGS, in industry parlance its factory margin. Also, Jacobson is overselling variable profit, that’s just BOM (bill of material) plus director labor and variable cost (ie energy consumed in production of a good, grease consumed in production of a good, etc.). Sure it’s better than nothing, but it doesn’t include capital expenditures, fixed overhead, corporate overheads and on and on. True, you should use variable profit for assessing one investment vs another, but considering a chasm of cost in invested capital and FOH, it’s long way from variable profit to factory profit that is volume dependent in this business then further still to true operating profit (factory profit less corp cost such as engineering and SGA).
You completely missed the fact Tesla is an energy company, not just a car company.
Their solar and battery storage businesses are VERY profitable and help prop up the company as the EV market dips.
I was talking with an engineer there and he was saying their Megapack grid-scale battery storage product is selling extremely well, not just for smoothing non-steady renewable energy sources like solar and wind, but also as community safeguards against grid interruptions due to severe weather.
Recent storms and forest fires have highlighted the benefit of localized grid protections, and demand for energy storage has soared and will continue to grow.
Solar panels are also selling well thanks the 30% federal tax credit.
The format may not work properly, but this was a tweet from Jon Erlichman a bit ago. I’ll try paste it if you don’t want to click:
https://x.com/JonErlichman/status/1849240826204803249
Tesla’s third quarter revenue:
2024: $25.2 billion
2023: $23.4 billion
2022: $21.5 billion
2021: $13.8 billion
2020: $8.8 billion
2019: $6.3 billion
2018: $6.8 billion
2017: $2.9 billion
2016: $2.3 billion
2015: $936.8 million
2014: $851.8 million
2013: $431.3 million
2012: $50.1 million
2011: $57.7 million
2010: $31.2 million
While battery storage systems are installed as counterparts to solar and wind farms (because their outputs are variable), that’s not the only reason they exist. Electrical demand is incredibly variable, and battery energy storage systems get built that have no direct relationship to renewable energy generation and are charged by the grid when demand is low (and prices are low) and output the stored energy back to the grid when demand (and pricing) is high. And those cycles exist not just because output from renewable energy generation is inconsistent. Energy demand itself is extremely variable. And yes, Tesla is a dominant player in providing battery systems for utility scale BESS.
Batteries are a terrible way to do utility scale storage – but they are relatively easy to implement and pay off. Pumped storage is the way to go, but permitting and finance issues (and the deregulation/ split up of the electric companies) has made pumped storage not part of the conversation – and most of the existing fleet is coming towards the end of their original permits – although I assume most will get renewed. I keep hoping the system operators will come up with an incentive for me to install a battery with some kind of demand response system since I live in a net metering state and do not need to time shift to maximize my savings. Having a battery attached to my solar system would give me a nice backup power source.
Matt, you left out the part where Tesla stock does not pay dividends, and the company structure is more a cult than a business.
Unlike GM, Nissan, Ford etc, Tesla can sell all of its carbon credits. In fact, Tesla has no other use for them.
Wait, WHAT?
Fucking Faraday Future is more profitable than Rivian? LOL
Well when you’ve only sold 13 cars your costs are less…
Results just came out. Margins back up to 19.8%. Less revenue but a beat on free cash.
Thanks Matt… great article.
A few things I’d like to add… First, because Tesla has been at BEVs the longest, they’ve also are the one BEV maker that has more BEV manufacturing details worked out to a far greater extent than anyone else. Related to that, because they’ve been at BEVs the longest, what they invested in BEV R&D has been amortized to a greater extent.
Second… Tesla doesn’t have any ‘legacy products’ with significantly different designs they need to support.
They’ve been 100% BEV from day 1. And that means they never had to spend any time/money designing/building/supporting ICE engines and related stuff like multi-speed transmissions, exhaust/emissions systems, fuel systems, ignition systems and other ICE-specific stuff.
And lastly… Tesla doesn’t have dealers. Thus, there isn’t a dealer taking their own cut. I’m very sure that also helps contribute to Tesla’s profitability.
Add in the profits from the charging network…
I think a big difference between Tesla and say GM/Nissan is Tesla’s first model was the Roadster, super expensive niche, 2nd product the Model S, still fairly expensive but more mainstream, and they were getting the carbon credits but also buyers were getting the old tax credit. GM burned through the tax credits with $35k Cruze’s(the Volt) and Nissan with the Leaf.
So it’s not just that they had an early advantage, what they focused on first was a better use of the incentives at the time than what the competition was doing. GM made enough Volts to basically use up their tax credit allowances once the Bolt started catching it’s stride(or fire). Nissan I don’t think ever actually sold enough Leafs to use up all the old credits which says something else about how much they really went in on EVs.
“ 3, Y, S, X,”
Ya chicken! 😉
We could have had it all…
I wonder how much resentment plays into Tesla’s more recent returns given that it sunk a bunch of Tesla customers underwater to win that price war. Nothing like buying car in January for $60k and seeing that car selling new for $45k in April to leave a foul taste in your mouth.
There are a lot of details hidden in the numbers here.
Tesla did not make a profit on cars until 2021. Before that, profit was due to sales of credits, which is basically a form of public subsidization. which was covered above. Or bitcoin sales as well.
So, in reality the most successful and largest EV player made a profitable product just since 2021. The fact that others are still figuring it out 4 years later doesn’t seem all that surprising to me in an emerging market.
But, also, I wouldn’t be surprised if there was some “aggressive interpretation of acceptable accounting principles” or some such thing.
This x1000
came here for this
Also, the Leaf was the #1 selling EV for a long time before the 3 finally overtook it.
Didn’t there used to be a big company with a name like GM or something? Fortunes change.
Great article. Not only does it cover the economics of the situation but in an entertaining and simple method. Love to see more of this in other stories
I do think Tesla’s continuing success selling basically the same cars is putting Alfred Sloan’s theory of planned obsolescence to the test.
Auto writers love clowning Nissan for selling an old Z and GTR, Dodge for selling an old Charger, and so on.
Maybe that isn’t as bad as we’ve been led to believe.
As EVs, I think they get a pass despite being “old”. The Dodge Charger is “ancient” because it is a big RWD sedan with a V-8. Might as well be from 1968 (which was half the point when they rolled it out).
The Model S is still fairly futuristic to most people despite being a decade old car.
I think what V10omous is saying is- Maybe good enough is actually good enough. Not to say that we shouldn’t progress, but a Charger from 2023 is nothing like a charger from 1970 except in name and engine layout. Far safer and more efficient now vs then.
And maybe, that’s ok.
What I mean is that “old” shouldn’t be an insult or disqualifying in itself.
If something else is better than a 2023 Charger for the money, make the case. What, objectively, makes the “old” Charger not as good a purchase as a 2006 Charger was vs its competition?
When I hear complaints about the LX cars, it’s usually stuff like “dId YoU kNoW tHeIr ReAr SuSpEnSiOn CoMeS fRoM a 1998 E cLaSs”, not any kind of comparison to a 60s Charger.
Smiley to you just for the formatting.
Also to your point, see: the outgoing 4Runner. Maybe it is more like a “right car for the right time/market” thing.
I wish I had thought of the 4Runner in my original post. I didn’t want this to just be about the typical whipping boys like the Charger.
Yeah, it’s a dumb statement because old and simple is what those buyers want. FFS, they should look at the years-long waits for Morgans. I’d buy a new ’90 Legacy wagon for whatever they’re charging for a new Outback tomorrow. I think the criticism makes more sense with the GTR because that car’s selling point was being high tech. It stayed on sale so long that the tech almost became vintage. I never liked it, so it was never for me, but if they still had enough buyers, couldn’t afford to engineer a successor, and it hadn’t been legislated out of existence, why not keep selling it?
And those LX car whiners completely miss some REAL reasons why FCA/Stellantis needed to update/replace it.
The real reason the LX needed to be updated/replaced was because it was never designed to accommodate things like hybrid or battery-electric powertrains.
And basically with tougher fuel economy and emissions standards, modern cars need to accommodate that.
Actually just a different version of it. The expensive battery portion of the car only has so much life in it. After it fails it is not economical to just replace the battery you need to replace the whole car. Basically genius if you are the manufacturer not so much if you are the buyer.
Well, the Charger has been dead for almost a year now, and the GTR is supposed to stop this month, but the Model S keeps chugging along. It’s too pricey to be compared to a Beetle, but maybe it fits the bill to be a modern Chaika?
I wonder if it’s a function of modernity, particularly with EVs. Dodge was a market of 1 and had a product with wide appeal to the “lizard” part of the brain in a lot of people (this is not intended as an insult!), but what is there really left to offer on a Tesla? They can already be optioned to insane acceleration numbers and even the “slow” ones aren’t slow, the simple styling tends to age well enough and for the demographic, and how many more luxury type features can they add that people really want (and that can’t be added as an update without expensive changes to the BiW or interior)? Much of what’s been added seems to be software and it’s stuff that nobody is really asking for. In the old days of PO, there was obvious style differentiation, but also added features, often making their way down from higher end cars. Nowadays, what’s left to add? Almost everything has AC, power everything, decent stereos, fairly quiet, decent handling for most, brakes, connectivity crap, and people complain when heated seats and steering wheels aren’t optional on even the cheesiest subcompact. I had to go out of my way to buy something that didn’t have some of this stuff! Only things I can think of that’s still the province of higher end cars are continuously adjustable suspension and massage seats and the former will likely stay that way due to expense and long term cost.
I’m with you. There is nothing inherently wrong with old designs. But there usually comes a point where the old design is no longer competitive in some way. It could be any number of things or more (crash, mpg, speed, handling, comfort, NVH, etc. etc. etc.). I think the assumption is that in a decade’s time there are significant improvements that even the most advanced designs start to fall behind. But, to your point, that doesn’t necessarily have to be true and people should really judge something on its merits.
I am just waiting for the eventual market that springs up for “classic” or “vintage” EV’s. I know it will hit (just not when), and those holding onto old Tesla’s will be able to sell to those who want to restore etc.
I was surprised this was not mentioned more in the article.
With a basic understanding of a business depreciation of assets – make a model for more than 3 years you get a decent boost to profit – make it for 13 like the model S? All your dies are paid for and you’re printing money. This is why they can hang on to “good enough” models like the Durango and… Compass? These models are funding basically everything.
To continue your last statement of “…just basic economics.”, we should also be ready for more companies to fail. Or, more likely, not even enter the industry because the barriers are so high.
I still can’t buy a Tesla, though….
We saw this also when the Miata came out. Big demand and several clones but noone could compete.