Tesla's Q3 Earnings Preview: Back to the Basics of Building Cars | Moomoo Research

Tesla will release its third-quarter financial report for 2024, ending September 30, after the market closes on October 23, 2024, Eastern Time. In recent weeks, Tesla's stock price has experienced several fluctuations, particularly after the sales data announced earlier this month fell short of market expectations, and following the "We, Robot" event. These factors have collectively contributed to the decline in Tesla's stock price.

According to Bloomberg consensus estimates, Tesla's Q3 is expected to be:

-Revenue of $25.534 billion, a year-over-year increase of 9.36% and a quarter-over-quarter increase of 0.14%;

-Adjusted net profit of $2.055 billion, a year-over-year decrease of 11.28% and a quarter-over-quarter increase of 13.4%.

Overall, Tesla's performance shows growth compared to the previous quarter, as the company maintains a certain momentum despite facing market competition and technological challenges. However, the year-over-year decline in adjusted net profit and earnings per share also highlights the pressures the company faces during its expansion.

Tesla's business structure is primarily divided into three main segments: automotive, energy, and services & others.

-The automotive segment includes revenue from electric vehicle sales, leasing income, and sales of regulatory credits.

-The energy segment encompasses a comprehensive range of solutions from solar power generation, energy storage, to electric vehicle charging. This segment's revenue comes from the sale and leasing of related products and services.

-The services & others segment includes non-warranty after-sales services, paid charging services, and used car sales.

Currently, considering that Tesla's main revenue source remains the automotive segment, accounting for 88% of total revenue, the number of electric vehicles delivered in the third quarter is particularly important. With the recent conclusion of Tesla's Robotaxi Day, we believe that Tesla's focus will at least temporarily return to automotive fundamentals.

Tesla's production in Q3 was 469,796 vehicles, a quarter-over-quarter increase of 21.53% and a year-over-year increase of 9.13%; the delivery volume was 462,890 vehicles, a quarter-over-quarter increase of 4.27% and a year-over-year increase of 6.4%.

The delivery volume for the third quarter still fell short of market expectations, although the gap is very small, leading to a drop in Tesla's stock price after the delivery data was released. The high-interest rate environment has weakened the purchasing power of consumers who rely on loans to buy cars. However, the Q3 delivery volume marks the end of the year-over-year decline in sales for the first half of 2024, and recent economic conditions show some positive signs, which may indicate a recovery in demand over the next few quarters.

In Q2 2024, Tesla's deliveries exceeded production, partially reversing the record from Q1 where production exceeded deliveries by 47,000 vehicles. In Q3, however, the delivery volume fell back below production by about 7,000 vehicles, resulting in a moderate increase in inventory that should not significantly burden working capital. Overall, the current inventory levels held by the company remain high.

Due to varying pricing measures across regions, many discount/incentive measures can easily lead to potential fluctuations compared to estimates. We expect the average selling price in Q3 to be flat year-over-year or slightly down.

In the United States, average selling prices fluctuated in Q3, with S/X model prices increasing by 1-2%, Model 3 prices remaining flat, while Model Y prices decreased by about 1%. Throughout Q3, Tesla offered a 1.99% financing rate discount, and at the beginning of this month, Tesla introduced a new loan policy: starting October 8, 2024, American consumers purchasing new Model 3 and Model Y vehicles can enjoy 0% annual interest loans for up to 72 months.

In the Chinese market, prices remained stable in Q3, with the last price cut occurring in mid-April; however, throughout Q3, Model 3/Y continued the 0% interest loan strategy. These incentive policies significantly boosted Tesla's sales in China, with Tesla announcing a 37% month-over-month increase in deliveries in early September 2024.

In Europe, prices are expected to increase slightly quarter-over-quarter, with prices for Model 3 raised by about 1,500 euros in early July, prior to the EU imposing tariffs on Chinese-made electric vehicles. Although the tariffs have been postponed, the upward price trend remains.

Based on the assumption that the average selling price may remain flat year-over-year or slightly decline, we do not expect significant upside potential for revenues from the automotive sales segment.

In the Q2 earnings report, revenue from the sale of automotive regulatory credits significantly increased, leading to an overall automotive revenue that exceeded expectations. In fact, the revenue from pure automotive sales in the previous quarter was below market expectations.

We expect credit revenue to support Q3 performance once again, as part of government measures encouraging environmental protection, allowing electric vehicle manufacturers to earn additional income by selling their surplus emission credits to traditional manufacturers that fail to meet standards. The sale of credits is very opaque and difficult to predict, but as compliance standards tighten, demand for registered credits is expected to increase, thus enhancing Tesla's pricing power for credit sales. However, in the long run, as traditional automakers enter the electric vehicle market, demand for these credits is expected to gradually decline.

The factors influencing automotive gross margins are quite complex. Overall, we expect gross margins to improve quarter-over-quarter in Q3, but decline year-over-year, with specific influencing factors as follows:

1. Increase in Delivery Volume

Tesla's delivery volume in Q3 reached approximately 463,000 vehicles, a quarter-over-quarter increase of 4.27%. The Shanghai factory fully restored its production capacity in Q3, while it only had a 75% capacity utilization rate in Q2, effectively amortizing fixed costs and indirect expenses, thus providing upward momentum for gross margin improvement. However, insufficient capacity at the Austin and Berlin factories may offset some of the gross margin growth. Additionally, layoffs in Q2 have reduced operational costs, helping to increase gross margins in Q3.

2. Decrease inRawMaterial Costs

Although raw material prices declined in Q2, the lagging effect of cost reflection means that some of the production costs for vehicles sold in Q2 may still be based on the higher raw material prices in Q1. In contrast, Q3 gross margins are expected to improve.

3. Positive Impact of Full Self-Driving (FSD)

FSD significantly boosted Tesla's gross margin in Q2. We anticipate that the launch of the ASS (Actually Smart Summon) feature in Q3 will further increase FSD revenue recognition, thereby enhancing gross margins. Additionally, Tesla added FSD functionality to the Cybertruck on September 30. As FSD functionality is included in packages previously sold, we expect some related revenue recognition in Q3, further improving gross margins.

1. Pricing and Incentive Measures

In Q3, Tesla's product pricing may remain stable or only slightly decline. However, the introduction of more loan incentive measures may put some downward pressure on gross margins.

2. Changes in Product Mix

According to media reports, sales of the Cybertruck may significantly increase quarter-over-quarter. However, it currently appears that the Cybertruck may still be operating at a negative gross margin, which could adversely affect overall gross margins.

3. Tariff Impact

Tesla is affected by tariffs on raw materials and finished products. In Q3, the U.S. increased tariffs on imported Chinese electric vehicle batteries and battery components, which may impact gross margins. This increase in tariffs will have some effect in Q3, and the impact may become more evident in Q4.

In the energy storage sector, Tesla deployed 9.4 GWh of storage products in Q2, more than double the 4.1 GWh in Q1, setting a record for quarterly deployment. In Q3, Tesla's energy storage deployment reached 6.9 GWh, although it declined by 26.6% quarter-over-quarter, it still showed a year-over-year growth of 73.3%, indicating strong growth momentum. According to Bloomberg consensus estimates, Tesla's energy business revenue in Q3 is expected to grow by 41% year-over-year to $2.652 billion, and we anticipate that the energy business may exceed expectations.

Figure: Quarterly Energy Storage Deployment (GWh)

Source: Company Announcements

The gross margin for the energy business reached 25% in Q2, significantly higher than the automotive business's 15%, demonstrating the high profitability of this segment. The growth of this business helps to improve Tesla's overall gross margin.

Overall, the likelihood of exceeding expectations for pure automotive sales revenue in Q3 appears low, while automotive regulatory credits and the energy business will again support this quarter's performance. Gross margins are expected to improve quarter-over-quarter but continue to face year-over-year pressure.

Looking at past stock price reactions following earnings reports, even when some quarters' revenues or earnings per share fall short of expectations, stock prices still rise significantly after the earnings call. This is attributed to Musk's ability to convince investors that Tesla's future valuation will increasingly come from imaginative ventures like affordable models, Robotaxi, or Optimus.

However, the "We Robot" event on October 10 suggests that the paradigm may have shifted, with tangible products and concrete profits becoming more important to investors than future concepts and promises. Investors are beginning to focus on specific implementation details and rollout plans, and in the short term, it is difficult to predict when these technologies will mature or become profitable. If Musk can disclose more details and exceed expectations regarding plans for affordable models and Robotaxi during this earnings call, it could help restore investor confidence, but the Q3 performance alone is expected to lack surprises.