Although Tesla has embarked on the solar energy business in recent years, its most prominent business is still the automotive sector. The company major revenue contributor still comes primarily from the automotive segment.
As you will see in the following charts, the growth of the company depends almost entirely on the automotive segment. Tesla automotive business contributes well over 80% of sales to the company total revenue.
In this article, we will measure the success of the automotive business based on the analysis of its revenue, gross margin and the respective sequential as well as year over year growth rate.
With that in context, we will dig into the detail of Tesla automotive revenue and find out its respective gross margin reported in the company financial statement. Besides, we will also track the sequential and year on year growth rate of the automotive segment.
Before we begin, let’s take a look at the company income statement to see what the automotive revenue is made up of:
As shown in the above snapshot of a portion of the income statement, Tesla automotive revenue consists of the following revenue segments:
Automotive sales include revenues related to sales of Tesla primary products such as 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 included as part of automotive revenue.
Automotive leasing revenues are sales generated from leasing of Model S, Model X and Model 3. In addition, sales of electric vehicles with resale value guarantee is treated as operating lease and is included in automotive leasing revenue under lease accounting. As of Q3 2019, Tesla has already started the leasing of Model 3.
The following charts show the quarterly automotive revenue and the respective GAAP gross margin.
Chart of Tesla Automotive Revenue
The chart above shows Tesla quarterly automotive revenue for the past 5 years from 2015 to 2019.
As seen from the trend in the chart, automotive revenue is growing at a very impressive rate. Automotive revenue was only $1 billion in Q1 2015 but has grown as much as 500% to $5 billion in Q3 2019.
The growth was specifically exceptional in 3Q18 and 4Q18, hitting record high at more than $6 billion in each of the quarter respectively. The exceptional growth was due to the record delivery of Model 3, Tesla first mass produced electric vehicle that is targeted for the mass market.
Tesla Automotive Revenue Gross Margin
In terms of automotive revenue gross margin, the average quarterly gross margin for the past 5 years was around 23%. From the chart above, the gross margin for automotive revenue has been oscillating between the 20% and 30% range over the shown period.
Automotive revenue gross margin was more than 25% when revenue hit record high at more than $6 billion in 3Q18 and 4Q18. The reason for the remarkable gross margin could be due to the record delivery of Model 3. The mass production of Model 3 has allowed Tesla to save cost and this subsequently led to higher gross margin.
In the latest quarter of Q3 2019, gross margin has risen to about 23% even though automotive revenue was only slightly more than $5 billion. This remarkable result shows that Tesla management has done a great job in bumping up the gross margin on lower sales. Tesla has managed to keep manufacturing cost down as a result of the higher volumes of Model 3.
Moving into the future, I believe Tesla gross margin will rise even further, judging from its highly successful Model 3. Not to mention that Tesla will launch the Model Y in the near future. The Model Y is touted as the next generation crossover utility vehicle (CUV) which is highly sophisticated and is the world first full electric CUV. The appeal of Model Y to the mass market will likely be undisputed and follow that of Model 3.
Tesla Automotive Revenue Breakdown
The chart above shows the automotive revenue breakdown in two major segments which are automotive sales and automotive leasing.
As seen from the chart, automotive sales revenue makes up the majority of automotive revenue, reaching an average of 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 comes mainly from automotive sales revenue. In contrast, automotive leasing revenue has stayed stagnant in most of the quarters. The slow growth of automotive leasing is somewhat expected as Model 3 leasing has only started in Q3 2019.
Ratio of Tesla Automotive Revenue to Total Revenue
From the chart above, Tesla automotive revenue had contributed in average of 87% of total revenue for the past 5 years. In other words, the bulk of the revenue came mostly from automotive revenue. The high proportion of automotive revenue with respect to total sales shows the importance of automotive revenue in driving the growth of the company not only in the past but also into the future.
In 2015, as much as 95% of Tesla total revenue came from automotive revenue. But this percentage has dropped steadily over the years and reached about 85% as of the latest quarter of Q3 2019. The decline of the ratio can be attributed to Tesla expanding into other business initiatives such as energy storage and solar generation system which have slowly contributed a significant amount of sales to the company top line growth.
While Tesla has multiple business segments, its major revenue contributor still comes prominently from its automotive sector. The above chart shows that Tesla is relying heavily on its automotive sector for growth. In other 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 in the automotive sector would certainly spell disaster for the company.
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 19 quarters was around 14%.
You may have noticed that there was a sequential drop of 41% in revenue in 1Q19 compared to the prior quarter. The severe drop in sequential revenue was mainly due to a lower vehicle delivery in that particular quarter.
Tesla attributed the drop in revenue in that quarter to the pull-forward of sales from Q1 2019 to Q4 2018. Customers were rushing to purchase electric cars in that quarter before the reduction of federal tax credit starting 2019 in the US. For the detailed tax credits, please visit Tesla faq page: Tesla Faq on Tax Credit.
In short, despite the negative growth rate in a few quarters, Tesla still managed to achieve an average QoQ growth rate of 14% for the past 19 quarters. Moreover, sequential growth rates were mostly positive and double digits in most quarters in the chart above, indicating that Tesla automotive revenue growth in the past had been sort of outstanding.
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 15 quarters was around 66%.
The average double digit yoy growth rate of 66% for automotive revenue is extremely impressive. The results are kind of expected, the chart above shows that all quarters recorded positive yoy growth rate except in Q3 2019.
The year over year growth rate in 3Q18 and 4Q18 were even more impressive, recorded a yoy growth rate of triple digits. The first negative yoy growth rate was recorded in Q3 2019. The result was partly due to the pull-forward of Model 3 sales to Q3 2018 because of the reduction in federal tax credits for electric vehicles in the US.
Overall, Tesla had an extremely impressive yoy growth rate for the past 15 quarters for automotive revenue. Tesla automotive sector had grown tremendously based on its historical results.
From 2015 to 2019, Tesla quarterly automotive revenue had grown from a mere $1 billion of sales to more than $5 billion of sales in just over 5 years. The growth in automotive sector had been largely based on only one product, which is the Model 3. Model 3 is the first mass-production electric vehicle Tesla had created and had been highly successful, judding from its historical automotive revenue.
As seen from the qoq and yoy growth chart, Tesla automotive sector growth is not slowing down. In fact, I believe that going into the future, the automotive revenue will grown even further as Tesla will launch more variants of electric vehicles in the future.
1. Tesla financial figures in this article were obtained from Tesla Investor Overview.
2. Featured image was obtained from Pål-Kristian Hamre.