Despite acquiring SolarCity in 2016, Tesla still relies heavily on its automotive business as the main revenue source.
As of 4Q 2020, Tesla’s automotive segment contributed over 86% of sales to the company’s total revenue on a trailing 12-month or TTM basis.
In this article, we will look at Tesla’s automotive business from the perspective of revenue and gross margin.
The gross margin measures Tesla’s automotive sector profitability when taking into consideration only the costs of revenue while excluding other costs, including R&D, taxes and interest expenses.
Additionally, this article also briefly mentions Tesla’s automotive sector quarterly and year-over-year (YoY) growth rates.
Let’s explore Tesla’s automotive business.
Tesla’s Automotive Sector
Before we begin, let’s take a look at Tesla’s business hierarchy as shown in the following diagram:
As shown in the snapshot above, Tesla’s automotive sector is divided into 2 major segments and they are:
Tesla’s Automotive Sales
Automotive sales include revenues related to sales of Tesla’s primary products such as the Model S, Model X and Model 3/Y 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.
Tesla’s Automotive Leasing
Automotive leasing revenues are sales generated from the leasing of Model S, Model X and Model 3/Y.
In addition, sales of cars with resale value guarantee are treated as an operating lease and hence, are recognized as automotive leasing revenue under the lease accounting standard.
Tesla has already started the leasing of Model 3 in 2Q 2019 and soon the Model Y.
Chart of Tesla’s Automotive Revenue – Quarterly
As mentioned, Tesla’s automotive revenue is basically the sum of the automotive sales revenue and automotive leasing revenue.
Based on the chart, Tesla’s automotive revenue has been growing at a very impressive rate over the past 6 years.
For instance, Tesla’s made a modest $1 billion in quarterly automotive revenue in Q1 2015 but that figure has since grown more than 900% to a little over $9 billion as of 4Q 2020.
The exceptional growth in automotive revenue has been driven mainly 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 will continue growing in 2021 and beyond, considering that the company is now delivering a number of new automotive products, including the Model Y and Cybertruck in 2021 and beyond.
For your information, Tesla has already started the Model Y production in the Fremont Gigafactory in 1Q 2020 and started the delivery in 2Q 2020.
Chart of Tesla’s Automotive Revenue – TTM
The TTM or trailing 12-month revenue is best used to see the long-term trend of Tesla’s automotive revenue, whether going up or down.
As the chart shows, Tesla’s TTM automotive revenue has been growing nicely in the last 6 years and reached a new high at $27 billion as of 2020 Q4.
Also, Tesla’s growth in TTM automotive revenue may have stalled for several quarters in 2019 but it continued to trend higher again in 2020.
The accelerated growth in Tesla’s automotive revenue in 2020 may have been driven by the recently completed Gigafactory Shanghai and hence, the new delivery of Model 3 and Model Y in China.
Tesla’s Automotive Revenue Breakdown
The chart above shows the breakdown of Tesla’s quarterly automotive revenue into 2 major segments, and they are automotive sales and automotive leasing.
As seen from the chart, Tesla’s automotive sales revenue took up the majority of the automotive revenue, reaching an average of more than 90% of the total automotive revenue.
On the other hand, Tesla’s automotive leasing revenue contributed only a tiny portion of sales to total automotive revenue.
For example, Tesla’s automotive sales revenue reached as much as $9 billion on a quarterly basis in 2020 4Q as opposed to only $280 million for the automotive leasing revenue generated in the same quarter.
Therefore, Tesla’s automotive sales revenue was more than 30X the size of its automotive leasing counterpart in Q4 2020.
Ratio of Tesla’s Automotive Revenue to Total Revenue
From the chart above, Tesla’s automotive revenue contributed an average of 87% of total revenue for the past 6 years.
As of 4Q 2020, Tesla’s automotive revenue made up roughly 86% of total revenue.
The high proportion of Tesla’s automotive revenue with respect to total revenue indicates the importance of the automotive sector relative to other business sectors in driving the growth of the company.
Nevertheless, the ratio has dropped steadily over the years from 95% in 2015 to about 86% as of 2020 Q4.
The decline of the ratio can be attributed to the expansion of Tesla’s other business initiatives, including energy storage and solar generation system which have slowly contributed a significant amount of sales to the company’s overall revenue.
Despite multiple business segments, Tesla’s major revenue contributor still comes prominently from its automotive sector.
The above chart shows that Tesla still pretty much relies heavily on its automotive sector for growth.
In another perspective, Tesla is counting on the success of the Model 3 for its survival.
As pointed out by Elon Musk, CEO of Tesla, “Without Model 3, Tesla will not survive.”
In short, if the Model 3 failed to reach the desired market share as expected, it would certainly spell disaster for the company.
As of now, there are still plenty of risks in buying Tesla stock.
For one, Tesla is still pretty much counting on a single product for growth, which in this case, is the Model 3.
Tesla’s Automotive Gross Margin – Quarterly
In terms of Tesla’s automotive gross margin, the average value for the past 5 years reached 24% in 2020 Q4.
Also, Tesla’s quarterly automotive gross margin reached about the same value at 24% in 2020 4Q.
Tesla’s automotive gross margin has been oscillating tightly between 20% and 30% between 2015 and 2020, indicating that the company has been able to somewhat control its costs of revenue successfully.
As shown in the chart, Tesla’s automotive gross margin has slowly improved between 2018 and 2020, and reached its current value of 24% in the 4th quarter of 2020.
That said, the mass production and deliveries of Model 3 have allowed Tesla to control production costs and improve efficiency, and these practices have resulted in a higher gross margin.
Tesla’s automotive gross margin may improve even further in 2021, considering that the company is bringing another mass-produced vehicle into the market, the Model Y.
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 Gross Margin – TTM
The TTM plot in the chart above is created to smooth out the quarterly plot and to display the long-term trend of Tesla’s automotive gross margin.
As seen in the above chart, Tesla’s automotive gross margin topped the 25% level again as of Q4 2020.
Also, the TTM plot shows that Tesla’s automotive gross margin has slowly improved from its 2018 level at 20% to its current level at 25%.
Again, the higher automotive gross margin has been a result of Tesla’s Model 3 mass production and deliveries in recent years.
This has resulted in better production efficiency and lower costs of production per vehicle.
The TTM automotive gross margin may tick higher in the future when Tesla’s other flagship vehicle, the Model Y, rolls into mass production and delivery.
Tesla’s Automotive Revenue QoQ Growth Rates
On average, Tesla managed to grow its quarterly automotive revenue by 14% every quarter between 2015 and 2020.
Over the 6 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 2020, Tesla had 3 consecutive quarters of positive QoQ growth rates in its automotive revenue.
As of 2020 4Q, Tesla’s automotive revenue grew north of 20% quarter over quarter, one of the best results the company has ever reported.
Tesla’s Automotive Revenue YoY Growth
Tesla’s YoY growth rates are even more impressive compared to its sequential growth rates.
Between 2016 and 2020, Tesla experienced only 2 quarters of negative YoY growth rates.
Ín 2020, Tesla managed to grow its automotive revenue in high double-digit in 3 out of the 4 quarters.
As of 4Q 2020, Tesla’s automotive revenue YoY growth rate surged to 46%, one of the best the company has ever reported.
To recap, Tesla has been having outstanding automotive revenue growth for the past 6 years between 2015 and 2020.
Tesla’s growth story has been phenomenal and looks unstoppable considering that the company is building a Gigafactory in all major continents.
Aside from the Model 3, Tesla has a couple of models coming up, including the Model Y and Cybertruck.
Tesla has already started producing and delivering the Model Y, another mass-produced vehicle touted to be having the same appeal as the Model 3.
Coming to 2021 and beyond, Tesla’s automotive revenue may go even higher, driven by new products launch.
That said, Tesla’s automotive gross margin should improve along with the expanding automotive revenue.
The success of Telsa’s automotive business has driven the company’s market capitalization past $800 billion at one point.
At this valuation, Tesla has overtaken Toyota, Ford and General Motors combined as the world’s most valuable automaker.
References and Credits
1. Financial figures in the charts were obtained and referenced from Tesla’s 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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