Tesla (TSLA, Financial) made a surprising turnaround in Q3 2024 by beating EPS estimates for the first time since Q2 2023. Despite a challenging competitive landscape in the U.S. and China and ongoing price cuts, Tesla halted the decline in its automotive gross margin. CEO Elon Musk's forecast of 20-30% vehicle volume growth in FY25 further boosted investor confidence, marking a significant increase from the anticipated slight growth in 2024.
- Key to the EPS beat was a 6% year-over-year decline in the cost of goods sold. Tesla's cost per vehicle hit a record low of $35,100, thanks to reduced raw material and freight costs and improved manufacturing efficiencies, particularly for the Cybertruck, which achieved a positive gross margin for the first time. Consequently, the automotive gross margin rose by about 230 basis points year-over-year to 17.0%.
- Cost-cutting measures also contributed to the better-than-expected earnings. Operating expenses fell by 6% in Q3 to $2.28 billion, following a 10% global workforce reduction announced in April.
- Revenue growth, however, was less robust on the automotive side, increasing by just 2% to $20.0 billion. The overall revenue growth of nearly 8% was primarily driven by a 59% surge in Energy Storage business revenue and a 33% rise in regulatory credit sales to $739 million.
- Elon Musk's optimistic vehicle growth forecast for next year alleviates some growth concerns. Achieving the high end of the 20-30% forecast would be a significant accomplishment, requiring a ramp-up in production of new, affordable models, expected to start in the first half of 2025.
- Musk also announced plans for the Cybercab to reach volume production by 2026, with an ambitious goal of producing 2 million units annually. For context, Tesla is projected to produce around 1.8-1.9 million vehicles across all models this year.
The main takeaway is that Tesla has temporarily eased concerns about eroding margins and slowing growth with this earnings report. If Tesla can maintain earnings growth—EPS was up 9% in Q3—it will support its extensive spending plans on projects like the Cybercab and AI. While one quarter doesn't establish a trend, this financial turnaround is a positive development for shareholders, especially after a 14% year-to-date stock decline before the recent gains.
