Author: Chen Nianhang

On October 20th, 2022, Tesla released its Q3 2022 financial report.

According to the report, Tesla has been profitable for 13 consecutive quarters, achieving record-breaking revenue, operating profit, and free cash flow.

In Q3, Tesla achieved an industry-leading operating profit margin of 17.2%, with a free cash flow of $3.3 billion.

During this quarter, logistics changes and supply chain bottlenecks have improved. Tesla has begun transitioning to a more balanced delivery and production structure while constantly increasing the weekly production capacity of its Fremont and Shanghai Super Factories. The production capacity of the Berlin and Texas Super Factories has also been steadily increasing.

Additionally, Tesla’s Q3 energy storage installation reached an all-time high, growing 62% YoY, and now the demand is outweighing the supply. More and more partners are joining the “accelerate the world’s transition to sustainable energy” team.

“Satellites” Released by Musk

The cost of the new model (possibly Robotaxi or passenger car) will be half the cost of Model 3, and the development of the new model platform is currently underway. Musk revealed this “satellite” during Tesla’s Q3 2022 financial report conference call and predicted that Tesla’s market value will surpass the total market value of Apple and Saudi Aramco (exceeding $4 trillion).

Key data of Tesla’s Q3 2022 financial report includes:

• Tesla’s Q3 revenue was $21.454 billion, a YoY increase of 56%, which is slightly lower than the capital market’s expected $22.132 billion.
• The net profit attributable to shareholders was $3.292 billion, an increase of 103% YoY, which is higher than the capital market’s expected $3.19 billion.
• Tesla delivered 343,800 new cars in Q3, which is lower than the expected 357,900 units by the market.- The gross profit margin for the key indicator of automobile, in the third quarter, was 27.9%, lower than last year’s same period of 30.5%, and it’s also the Tesla’s consecutive second quarter with a gross profit margin of less than 30%.

Pessimists believe that Tesla’s vehicle deliveries and revenue for this season are below expectations, especially the poor performance of the key indicator of gross profit margin, failing to meet the expectations of high growth from the outside. Additionally, it’s believed that Tesla will have a hard time reproducing the craze of high demand as before, as many competitors with similar car models are emerging. Therefore, the market demand for Tesla will decrease in the future.

Optimists believe that there is significant growth in all key data (vehicle deliveries, revenue) in Tesla’s financial report on a year-on-year basis, and considering various challenging external environments, Tesla’s impressive performance is already strong enough. Moreover, in terms of net profit, Tesla recorded a profit of USD 3.292 billion this season, which is not inferior to the traditional BBA veteran automakers, and even with the delivery volume scale far from coming up, the earning ability of Tesla is promising for the future.

However, no matter what, the most direct result is the attitude of the capital market after reading this financial report. Tesla’s share price on the trading day after the financial report dropped by nearly 7%, and its market value is now less than USD 650 billion.

Apparently, investors anticipated that this unappealing financial report would have a negative impact on the capital market, so Musk announced many product plans and set several flags during the conference call of this financial report, such as actively laying out the battery industry chain.Elon Musk revealed that Tesla is advancing its plan to build a lithium refinery along the Gulf of Mexico in Texas. It was previously reported that Tesla has been considering the project for several months and even rumored to be locating it in Louisiana.

Secondly, announcing the “new” vehicle production plan.

Tesla announced that the Semi electric truck is scheduled to start deliveries in December 2022, with the first batch expected to be delivered to PepsiCo. Musk also expects to produce 50,000 Semi electric trucks in 2024. In addition, the other popular model Cybertruck pickup is expected to start production in mid-2023 and will be produced at the Texas factory.

Thirdly, Tesla is developing a cheaper next-generation car platform.

“The cost of the next-generation model is expected to be half that of the Model 3 and Model Y” and its production and sales will exceed the total of all the company’s current products, which means more than 2.5 million vehicles. However, no one knows whether this car is a global model after the Cybertruck or a special low-priced model designed and built by Tesla’s Chinese team for the Chinese market.

Fourthly, Tesla’s future market value will exceed $4 trillion.

Musk said that even if the US economy enters a severe recession in 2023, the company can still generate considerable income, and the cash-flow it has is enough to support the launch of the company’s products, capacity expansion, and other expenses.

Musk also set a flag, saying that Tesla’s market value may surpass the sum of Apple and Saudi Aramco in the future, which is more than $4 trillion.

Putting satellites into space has become commonplace for Musk, so let’s turn to Tesla’s latest financial report to see what data and future development trends are worth paying attention to.## Q3 Key Financial Data and Outlook Interpretation

How did Tesla earn $3.3 billion in net profit in Q3?

Let’s first take a look at the key financial data in Tesla’s Q3 report.

Total revenue was $21.454 billion, which increased by 56% YoY (compared to $13.757 billion in the same period last year) and also increased QoQ (compared to $16.934 billion in Q2). However, why is the capital market still not convinced despite such a significant growth? It’s because the revenue fell short of their expectation of $22.132 billion.

82.9% of the total revenue in this quarter was generated from selling cars, which is $17.785 billion. Tesla delivered 343,830 new cars globally in Q3 to support this revenue.

In fact, this leads to Tesla’s current revenue structure, which can be roughly divided into three main categories: new energy vehicle business, energy business, and services & other businesses:

• New energy vehicle business: including sales of new energy vehicles, leasing of new energy vehicles, and carbon credit trading, etc.
• Energy business: energy storage, etc.
• Services & other businesses: insurance, supercharging business, etc.

Sales of new energy vehicles is Tesla’s unshakable primary business, accounting for over 80% of its revenue in recent years, and reached 82.9% in Q3, with a YoY growth of 52%. After all, it sold more cars.

In addition, Tesla’s new energy vehicle leasing business revenue also increased significantly in Q3 and is profitable, with a higher gross profit margin than car sales. However, this business has a small scale and does not contribute much to Tesla’s profit.

However, selling carbon credits (regulatory credits) is a solid way to earn money, and Tesla earned $286 million from it in Q3 this year. But, this source of income is not sustainable, as the revenue from this segment has been declining in the previous few quarters, reaching its peak of $679 million in Q1 2022.“`

In the non-new energy vehicle business, the development of energy storage and insurance businesses is relatively fast, which also drives the growth of energy and service businesses.

However, the current situation is:

• The revenue growth of the energy business is not as fast as that of the new energy vehicle business;
• The revenue growth rate of the service & other businesses is not low, but it is only increasing revenue and not profits. The gross margin of this business in Q3 is only 4%.

Take Supercharger as an example. The revenue in Q3 has tripled compared to the same period last year. In fact, Supercharger has gradually become a high barrier to entry for Tesla’s competition. After all, very few new energy vehicle companies in the world are building charging infrastructure with such intensity, and NIO, a domestic company, may be catching up.

According to the disclosed data, Tesla has built more than 35,000 charging stations in 46 countries around the world in the past 10 years, and car owners have accumulated 20 billion miles of mileage.

The following table shows Tesla’s revenue structure:

From the comparison between Q3 2022 and the full year of 2021, Tesla’s revenue structure is still quite stable, so there are no outstanding highlights overall, because the expectations of Tesla from the outside world are really high.

In addition to revenue and revenue structure analysis, we should also pay attention to Tesla’s ability to make money and control costs this quarter.

In terms of profitability, Tesla helped common shareholders earn a net profit of $3.292 billion this quarter, which doubled compared to the same period last year and made $1 billion more than the previous quarter.
“`From the perspective of net profit margin, the data performance of this quarter is 15.34%.

Another very important indicator is the gross profit margin of the automotive industry, which was 27.9% for Tesla in Q3, compared to 30.5% for the same period last year, which means that the amount of money earned from selling a car is reduced. If the money earned directly from selling carbon credits is deducted, then the data for Q3 is 26.8%.

But anyway, the performance of Q3 is better than that of Q2, because various external factors in Q2 led to poor performance in all data.

In this Q3, Tesla’s free cash flow is $3.3 billion, which is still very healthy.

Compared with the previous quarter, the total revenue growth, net income growth, and automotive gross profit margin all increased slightly. What efforts did Tesla make behind these data performances?

In summary, there are two aspects:

Deliver as many cars as possible; control operating costs.

The Q3 total revenue growth is due to the increase in car deliveries and the rise in the average selling price of cars (the Q3 average selling price per car is about $51,700), and of course, the revenue of other business segments is also increasing. However, there is also an external environment where exchange rate changes have had a negative impact.

Q3’s net income growth is also due to the increase in car deliveries, the rise in the average selling price per car, and the ability to earn more money from other businesses. But net profits did not meet market expectations, with a significant factor being the increase in supply chain costs (including raw materials and logistics).

Tesla specifically mentioned in its financial report that although there were fewer problems with parts supply in Q3, the ability to transport vehicles during the delivery peak became increasingly difficult and costly.

As we all know, Tesla tends to deliver large quantities of vehicles in the last few weeks of each quarter, which increases transportation costs and logistics instability. Tesla is also actively changing this situation to achieve a smooth delivery rhythm, reducing the transportation costs of each vehicle delivered. I wonder if these efforts will have a direct impact in the next Q4.## Q3 Gross Margin of Cars Slightly Increased Compared to Q2
The increase in Q3 gross margin of cars is due to the rise in the average sale price of vehicles and the increase in the total delivery volume.

Looking back a little, in Q2 of this year, due to the impact of the rising prices of raw materials in the supply chain, the suspension of work in Shanghai due to the epidemic and other factors, Tesla’s gross margin of cars declined drastically. However, in the third quarter, Tesla globally raised the prices of its vehicle models, which stimulated the growth of gross margin of cars in Q3. The problem now is that the absolute value of gross margin of cars cannot catch up with the same period of last year.

In terms of profit-making, in addition to open-source, it is also necessary to control costs. In Q3, Tesla has done a good job in cost-control.

Costs mainly include “research and development expenses” (R&D) and “selling, general and administrative expenses” (SG&A). Taking Q3 data as an example, Tesla’s R&D expense ratio was 3.42%, and its SG&A expense ratio was 4.48%, both of which were the historical lows in the past five years. The reduction in expense ratio directly affects the reduction of operating costs for delivering a single vehicle.

Especially in the high inflation environment, Tesla’s average per vehicle operating cost in Q3 was within 5,000 US dollars, which was lower than over 6,000 US dollars in the previous quarters. This is a clear cost control measure.

It is precisely because of open-source and cost-control that Tesla earned more than 3 billion US dollars in Q3, which is outstanding among global car companies.

The ultimate efficiency in car sales and operations is also the breakthrough point that domestic new energy vehicle companies are striving for.

Tesla’s Production and Delivery Performance

Throughout the previous discussions, the delivery performance of Tesla in Q3 was outstanding. Next, let’s take a closer look at Tesla’s current production and delivery performance.Tesla produced 365,923 vehicles and delivered 343,830 in Q3, with over 22,000 vehicles produced but not delivered due to logistics restrictions. In the first three quarters of this year, Tesla produced 929,910 vehicles and delivered 908,573, which means the inventory was mostly formed in Q3.

If Tesla’s goal to deliver 1.5 million vehicles this year is taken into account, and assuming that three quarters have already passed, Musk’s KPI has been completed over 60%. Can Musk still achieve the KPI for this year in the last quarter?

If we take a further look at Tesla’s production capacity layout, we can actually find that it is too dependent on the production capacity of the Shanghai super factory in China. This may also be why Q3 deliveries did not perform well, because the models produced in Shanghai will inevitably have a longer logistics cycle when exported.

Currently, Tesla has five major factories around the world; the absolute main force is the Shanghai super factory, which supplies not only the Chinese market but also markets outside North America.

The Berlin and Texas factories are currently not far from reaching capacity. In Q3, the Berlin factory had a weekly production capacity of 2,000 Model Y units, with a target of 5,000 units per week in the first quarter of next year. Combining the current situation in Europe and energy supply, it is unclear when this target will be achieved. The Texas factory is also slowly ramping up its production capacity.

In terms of design annual capacity:

• California factory: 100,000 Model S and Model X + 550,000 Model 3 and Model Y
• Shanghai factory: over 750,000 Model 3 and Model Y
• Berlin factory: over 250,000 Model Y
• Texas factory: over 250,000 Model Y (with Cybertruck production planned in the future)- Tesla’s Nevada factory will also produce Tesla Semi trucks (starting delivery in December 2022).

Tesla has planned an annual capacity of around 2 million units. However, the actual production in the first three quarters of this year was only 929,910, so it is estimated that the planned capacity can be achieved by more than 60% in 2022.

During the earnings call, Musk mentioned that the battery supply chain is the main limiting factor affecting vehicle delivery, so he also revealed that Tesla is laying out its own supply chain to directly control upstream raw materials. Musk also promised that Tesla will not reduce production in any way regardless of whether there is an economic recession or not.

Next, the mass production and delivery of Semi trucks and Cybertrucks will also face numerous challenges.

Revolutionary new models?

For Tesla, the biggest problem is that the main sales of the 3 and Y models are already old. Is Musk now no longer aggressive in developing new models, but rather focusing on FSD, robots, rockets, buying Twitter, and selling perfume?

Well, during the earnings call, Musk said that a more affordable Tesla model is coming, with a sales target that surpasses the total sales of all current Tesla models. As for when it will actually come out, it depends on Musk’s mood.Now there are two opinions outside: one is that this cheaper model is actually a Robotaxi; the other is that this car is a consumer-grade model jointly developed by the Chinese design team and Tesla’s global R&D team.

But regardless of which one, the most attractive thing is that the cost of this car, as Musk said, will be half of that of Model 3.

If this is true, it will be a product that changes the global electric car market.

Tesla’s Old and New Stories

If Tesla wants to support its future $4 trillion market value, it’s definitely not enough to rely on its current vehicle ownership and technological reserves. Tesla and Musk also need to find new stories to tell.

Tesla robots are one of their new stories, but the appearance of Optimus at AI Day this year disappointed many people. However, a new thing that has only been done for 2 years still needs more time, because the outside world always overestimates Musk’s short-term achievements and underestimates his long-term achievements.

On the other hand, Tesla also needs to continue to tell old stories, including full autonomous driving ability, including FSD, Dojo supercomputer, autonomous driving AI algorithm capabilities, and Robotaxi operation services to be launched later.

Musk confirmed in the earnings call that the FSD software will be released to paying users by the end of 2022 (the domestic market is still uncertain). As of this year’s Q3, the number of FSD beta users has reached 160,000, and the cumulative driving mileage of FSD beta is nearly 60 million miles.The old story also includes Tesla’s battery technology, CTC technology, as well as related production and manufacturing technologies such as integrated die-casting, which will be crucial for Tesla to ensure production capacity, reduce overall vehicle costs, and improve manufacturing efficiency. According to the Q3 financial report, Tesla plans to implement structural battery packs and front body integrated casting structures at the Berlin Gigafactory by the end of this year. This technology has already been implemented at Tesla’s California, Shanghai, and Texas factories.

By telling old and new stories, ensuring production capacity and vehicle delivery, and carefully managing costs, Tesla’s super profit-making machine is taking shape.

This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.