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Tesla Highly Successful Automotive Business

Tesla Gigafactory Shanghai. Source: Tesla Q3 2019 Update Letter.

Despite acquiring SolarCity in 2016, Tesla is still relying heavily on its automotive business as the main revenue source.

As you will see in the following charts, Tesla’s revenue growth depends entirely on the automotive segment. As of the latest quarter of 1Q 2020, the automotive business contributed well over 85% of sales to the company’s total revenue.

In this article, we will look at Tesla’s highly successful automotive business from the perspective of revenue, gross margin as well as sequential and year over year (YoY) growth rates.

Before we begin, let’s take a look at the company business hierarchy to find out what the automotive revenue is made up of and how it generates sales:

Tesla automotive business segment

As shown in the snapshot above, Tesla’s automotive sector consists of the following 2 major revenue segments:

Automotive sales include revenues related to sales of Tesla’s primary products such as the Model S, Model X and Model 3 vehicles. Besides, automotive sales also include revenue related to internet connectivity, Supercharger access, and specified software updates for cars equipped with Autopilot hardware. Sales of regulatory credits to other automakers is also part of automotive sales.

Automotive leasing revenues are sales generated from the leasing of Model S, Model X and Model 3. In addition, sales of electric vehicles with resale value guarantee is also treated as an operating lease and is included in automotive leasing revenue under lease accounting. Tesla has already started the leasing of Model 3 in 2Q 2019.

Let’s move on to look at the automotive revenue chart!

Chart of Tesla’s Automotive Revenue

Tesla automotive revenue from 2015 to 2020

Tesla automotive revenue from 2015 to 2020

The chart above shows Tesla’s quarterly automotive revenue for the past 5 years from 2015 to 2020.

Based on the chart, Tesla’s automotive revenue has been growing at a very impressive rate. For instance, the automotive revenue was only a modest $1 billion in Q1 2015 but the figure has grown roughly 500% to slightly over $5 billion as of 1Q 2020.

The growth of automotive revenue had been extraordinary between 2018 and 2020, hitting a record high at $6.4 billion in 4Q 2019. The exceptional growth has been mainly driven by the record delivery of Model 3, Tesla’s first mass-produced electric vehicle that is targeted for the mass market.

Tesla’s automotive revenue of $5.1 billion in Q1 2020 represents a year over year increase of nearly 38%. However, sequential growth was -19% when quarterly revenue growth declined from a record high of $6.4 billion reported in Q4 2019 to $5.1 billion in Q1 2020.

I believe the success of Tesla’s automotive segment will continue into 2021 and beyond, considering that the company is going to deliver a number of new automotive products such as the Model Y and Cybertruck in 2020 and 2021.

For your information, Tesla has already started the Model Y production in the Fremont Gigafactory in 1Q 2020.

Tesla’s Automotive Gross Margin

Tesla automotive gross margin

Tesla automotive gross margin

In terms of automotive gross margin, the average quarterly automotive gross margin for the past 5 years was around 23%. From the chart above, the gross margin for automotive revenue has been oscillating tightly between 20% and 25% in recent years, indicating that the company has been able to achieve the required sales volume to make production cost stabilized.

Also, the automotive gross margin has been on an uptrend throughout 2019 and reached slightly more than 25% in 1Q 2020. The growth in gross margin has been largely driven by the record Model 3 deliveries which reached 76,000 in 1Q20. The mass production and deliveries of Model 3 have allowed Tesla to reduce production costs, improve efficiency, and the result has subsequently led to a higher gross margin.

In the latest quarter of Q1 2020, automotive gross margin has risen to about 25.5% even though automotive revenue was only $5 billion, which was about 19% less than the previous quarter. Despite lower revenue compared to the prior quarter, Tesla has successfully increased its automotive gross margin from 22.5% in 4Q19 to 25.5% in 1Q20, representing more than a 10% increase sequentially.

The 1Q20 quarterly gross margin of 25.5% was the highest since 2019. The remarkable result shows that Tesla management has done a great job in improving the gross margin on lower sales.

In the future, I believe that Tesla’s gross margin will probably improve even further, judging from the highly successful Model 3. As mentioned, the delivery of Model Y has already started in 2020 and will most likely be another blockbuster automotive product that will drive gross margin higher.

The Model Y is touted as the next generation crossover utility vehicle (CUV) which is highly sophisticated and is the world’s first full-electric CUV. The appeal of Model Y to the mass market will likely be undisputed and follow that of Model 3.

Tesla’s Automotive Revenue Breakdown

Tesla automotive revenue breakdown

Tesla automotive revenue breakdown

The chart above shows the automotive revenue breakdown into 2 major segments which are automotive sales and automotive leasing.

As seen from the chart, automotive sales revenue takes up the majority of the automotive revenue, reaching an average of more than 90% of automotive revenue. On the other hand, automotive leasing revenue makes up less than 10% of automotive revenue.

In addition, the growth of automotive revenue has been mainly driven by the growing automotive sales revenue. In contrast, automotive leasing revenue has been stagnant in most quarterly results, contributing, on average, less than $300 million of sales. The slow growth of automotive leasing is somewhat expected as Model 3 leasing has only started in 2Q 2019.

Ratio of Tesla’s Automotive Revenue to Total Revenue

Tesla automotive revenue to total revenue ratio

Tesla automotive revenue to total revenue ratio

From the chart above, Tesla’s automotive revenue contributed an average of 87% of total revenue for the past 5 years. As of 1Q 2020, automotive revenue made up roughly 86% of total revenue, with the rest coming from the energy products and service and other revenue.

The high proportion of automotive revenue with respect to total sales indicates the importance of the automotive sector in driving the growth of the company.

Nevertheless, the ratio has dropped steadily over the years from 95% in 2015 to about 86% in the latest quarter of 1Q 2020. The decline of the ratio can be attributed to the expansion of other business initiatives such as energy storage and solar generation system which have slowly contributed a significant amount of sales to the company’s revenue growth.

Despite multiple business segments, Tesla’s major revenue contributor still comes prominently from its automotive sector. The above chart shows that Tesla is still pretty much relying heavily on its automotive sector for growth.

In another perspective, Tesla is counting on the success of Model 3 for its survival. As pointed out by Elon Musk, CEO of Tesla, “Without Model 3, Tesla will not survive.”

In short, any growth slowdown or failure of Model 3 would certainly spell disaster for the company. As of now, there are still plenty of risks of investing in Tesla stock as the company is still counting on a single product for growth, which in this case, is the Model 3.

Tesla’s Automotive Revenue QoQ Growth

Tesla automotive revenue QoQ growth

Tesla automotive revenue QoQ growth

The chart above shows the quarterly growth rate of automotive revenue. From a calculation that I did in a spreadsheet, the average quarter over quarter (QoQ) growth for the past 20 quarters was around 13%.

Over the 5 years from 2015 to 2020, Tesla has only experienced 2 QoQ declines of more than 10%. One was in 1Q19 at -41% and the other one was in 1Q20 at -19%.

The QoQ drop in automotive revenue in 1Q19 was largely driven by the pull-forward of sales from Q1 2019 to Q4 2018. In 4Q 2018, customers were rushing to purchase electric cars before the reduction of federal tax credit started to kick in in 2019 in the US. For the detailed tax credits, please visit Tesla faq page: Tesla Faq on Tax Credit.

As of 1Q 2020, Tesla experienced another serious decline in automotive revenue on a sequential basis at -19%. While Tesla made fewer sales in 1Q 2020 compared to the previous quarter, it managed to improve the GAAP gross margin to as much as 25.5% which was the highest since 2019.

In short, despite the negative growth rate in a few quarters, Tesla still managed to achieve an average QoQ growth rate of 13% for the past 20 quarters. The best part was that the company has been able to improve profitability as seen from the rising gross margin since 1Q 2019.

Tesla’s Automotive Revenue YoY Growth

Tesla automotive revenue YoY growth

Tesla automotive revenue YoY growth

The chart above shows the year over year (YoY) growth rate of automotive revenue. From a calculation that I did in a spreadsheet, the average YoY growth rate for the past 17 quarters was around 60%.

Out of the 17 quarters shown in the chart, Tesla reported only 1 quarter of YoY decline which occurred in 3Q19 at -12.2%. The rest of the quarters had been positive in YoY automotive revenue growth, indicating that the company has been having exceptional success in its automotive sector.

As of 1Q 2020, Tesla’s automotive revenue YoY growth was nearly 38% when total automotive revenue grew as much as $1.5 billion to $5.1 billion compared to the corresponding quarter a year earlier.

The success of the automotive revenue did not just stop at the revenue basis. In terms of gross margin, YoY growth was close to 28% when Tesla managed to improve its automotive gross margin from 20.2% in 1Q 2019 to 25.5% in 1Q 2020.

Overall, Tesla had an extremely impressive YoY growth rate for the past 17 quarters in automotive revenue.

Conclusion

To recap, Tesla has been having outstanding automotive revenue growth for the past 5 years between 2015 and 2020. The results had been mainly driven by the record-delivery of Model 3 since its inception in 2017.

Coming to 2020 and beyond, Tesla’s automotive revenue should go even higher, considering the launch of a couple of new automotive products such as the Model Y and Cybertruck. Specifically, the Model Y, similar to Model 3, is going to be another mass-produced electric vehicle targeted for the mass market. Hopefully, the Model Y will be another blockbuster automotive product that will drive revenue and gross margin higher for Tesla in the future.

Not only that, but the success of the automotive business has also driven Tesla’s stock valuation to a record high when the company’s market cap rocketed past $200 billion. Tesla has now overtaken Toyota as the world’s most valuable automaker in terms of market capitalization.

References and Credits

1. Financial figures in the charts were obtained and referenced from the quarterly and annual filings available in Tesla Investor Overview.

2. Featured image was used under Creative Common License and obtained from Pål-Kristian Hamre.

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