Over the past several years, Tesla has made tremendous progress, not only in vehicle shipment volumes but also in profitability.
In terms of cash, Tesla’s operations generated positive free cash flow in fiscal 2022.
Additionally, Tesla also has expanded outside of the U.S. by having its Gigafactory constructed all around the world.
In short, Tesla has drastically expanded its operations and this has resulted in margins expansion for the company.
In this article, we are going to look at Tesla’s margins and find out how the company’s margins have changed over the past couple of years.
In particular, we will take an in-depth look at Tesla’s gross margin, operating margin, net profit margin, EBITDA and some other non-GAAP margins.
Therefore, let’s move on to the following topics!
Tesla’s Margins Topics
1. Gross Margin
2. Operating Margin
3. Net Profit Margin
4. EBITDA Margin
5. Gross Margin Excluding Regulatory Credits
6. Operating Margin Excluding Regulatory Credits
7. Net Margin Excluding Regulatory Credits
9. References and Credits
Tesla’s Gross Margin
Let’s first look at Tesla’s gross margin which is calculated based on the company’s consolidated revenue and gross income.
At first glance, Tesla’s gross profit margin was much higher prior to the launch of the Model 3, notably at 24% in fiscal 2016.
This was the time when Tesla had only the Model S and Model X to deliver.
The Model 3 was still in its infancy in 2016 and Tesla’s energy was literally non-existent at that time.
For your information, Tesla’s acquisition of SolarCity was completed only in 4Q 2016.
Moving to 2018, Tesla’s gross profit margin declined significantly and reached only 15%.
Keep in mind that Tesla was ramping up its Model 3 production in 2018.
During the Model 3 ramp-up, Tesla produced only a small number of Model 3 that averaged less than 10,000 vehicles per quarter.
This explains the drop in Tesla’s gross profit margin as the company did not have the production volumes to keep its costs down.
However, Tesla’s gross margin slowly improved in subsequent quarters when the Model 3 production soared.
The Model 3 was followed by the Model Y in 2020.
As of 4Q 2022, Tesla’s gross margin has slightly exceeded 25%, a record high for the company in the last 8 years.
Moreover, Tesla’s Model 3 and Y production reached roughly 300,000 vehicles per quarter in fiscal 2022, also a record milestone for the company.
Tesla’s Operating Margin
The gross margin considers only the costs of goods sold while leaving out other expenses, including the R&D, SG&A, etc.
When these expenses are taken into consideration, Tesla’s operating margin declined significantly.
As seen in the chart, Tesla’s operating profit margin plunged into the negative area prior to 2020, indicating that the company had incurred a significant amount of operating expenses.
In fiscal 2019, Tesla managed to break even from an operating perspective when the operating margin hovered at 0.0%.
In subsequent fiscal years, Tesla’s operating margin continued to soar and reached a record high of 17% as of 2022 Q4.
Tesla achieved a record operating margin on the back of more than a million vehicle deliveries as of 4Q 2022.
Tesla’s Net Profit Margin
The net margin includes all expenses, including costs of goods sold, R&D, SG&A, taxes, and interest expenses.
As seen, Tesla’s net profit margin is significantly lower than the operating margin when extra costs such as taxes and interest expenses are taken into consideration.
Despite the unprofitable nature of the business in the past, Tesla managed to achieve a net profit margin of 15% as of fiscal 4Q 2022 on a TTM basis, a record quarter for the company.
The encouraging trend is that Tesla’s net profit margin continued to soar in fiscal 2022, indicating the record profits achieved in the same year.
Tesla’s EBITDA Margin
The EBITDA is the cash earnings prior to changes in working capital and is similar to net cash provided by operating activities.
However, the EBITDA is a non-GAAP measure in which certain expense items are excluded during the adjustment.
For your information, the EBITDA margin shown in the chart above is adjusted by the company based on criteria determined by Tesla’s management.
That said, Tesla’s EBITDA margin has been in the black and is seen rising over the last 8 years.
You may notice there was a notable dip in Tesla’s EBITDA margin during fiscal 2018.
The respective plunges exist in Tesla’s other margins as well.
As mentioned, Tesla was massively ramping up its Model 3 production between fiscal 2017 and 2018.
During this period, Tesla was burning cash and incurring expenses aggressively and this led to a dip in the company’s margins.
However, Tesla’s EBITDA margin was seen rising steadily after the period of huge expenses and cash burn.
As of fiscal 2022 Q4, Tesla’s EBITDA margin reached a record high at 24%, a new milestone for the company.
Tesla’s rising EBITDA margin has been driven primarily by soaring vehicle deliveries.
At an EBITDA margin of 24%, Tesla generated a significant amount of cash earnings, notably at $0.24 of cash out of $1.00 of revenue.
Tesla’s Gross Margin Excluding Regulatory Credits
For your information, Tesla gets a portion of its revenue from regulatory credits sales.
Investors argued that the regulatory credits sales have artificially boosted Tesla’s margins as these sales were not related to Tesla’s core operation of car making and distribution.
Additionally, Tesla’s regulatory credits sales may not be sustainable in the long run and may disappear once EV sales from other automakers rise to the same level as Tesla.
Without regulatory credits revenue, Tesla’s gross margin certainly decreases by a whole lot.
For example, Tesla’s gross margin clocked in at 26% in Q4 2022 with regulatory credit sales.
Without regulatory credits revenue, Tesla’s gross margin decreases to only 23% in the same fiscal quarter.
Tesla’s regulatory credits sales boosted its gross margin by as much as 3% in 2022 4Q, one of the largest ever reported.
As seen in the chart, the gap between the gross margins with and without regulatory credits sales tends to diverge as the plot moves closer to the right.
The gap between the gross margins was much smaller back in fiscal 2018, which was only about a 1% difference when regulatory credit revenue was much smaller back then.
As Tesla’s sales generated from carbon credits to other automakers increase, it helps to boost not only margin but also profitability as reflected in the chart above.
In short, Tesla’s gross margin has been artificially inflated by the regulatory credits revenue.
Tesla’s Operating Margin Excluding Regulatory Credits
Similarly, Tesla’s operating margins without regulatory credits sales are much lower as seen in the chart above.
The gap between both operating margins also diverges when the plots move to the right, meaning that Tesla’s regulatory credits sales have been increasingly getting larger.
As of 4Q 2022, Tesla’s operating margin totaled only 15% without emission credits revenue and 17% with emission credits revenue.
In other words, Tesla’s carbon credits sales boosted the operating margin by 2 percentage points in 4Q 2022.
Tesla’s Net Profit Margin Excluding Regulatory Credits
In terms of net profit margin, regulatory credit sales help Tesla attain profitability.
In other words, Tesla would have been unprofitable without the help of carbon credits revenue.
However, in fiscal 2022, Tesla’s profitability was so huge that the company would still be profitable even without the help from regulatory credit revenue.
For instance, Tesla’s net profit margin clocked in at a whopping 15% in Q4 2022 on a TTM basis inclusive of regulatory credits revenue.
Without regulatory credits revenue, Tesla’s net profit margin still came in at an impressive figure of 13% in the same fiscal quarter.
Therefore, Tesla can still make pretty handsome profits even without regulatory credit sales.
Tesla was seen incurring heavy losses in the past with margins being mostly negative numbers.
Tesla has made tremendous progress in the last 5 years in terms of vehicle production and deliveries and the expanding volume has led to growing margins.
That said, Tesla’s multiple margins, including both GAAP (gross, operating and net margins) and non-GAAP margins (EBITDA), are seen turning from negative to positive, and they have even reached record highs as of fiscal 4Q 2022.
More importantly, Tesla’s net profit margin finally made it into the black in 2022 even without factoring in the numbers from regulatory credits, signaling that the company’s profits have significantly risen and have far exceeded that of regulatory credits.
In short, Tesla’s margins, both GAAP and non-GAAP, will most likely improve further as the company’s vehicle production and delivery volume increases and gets more efficient in production.
References and Credits
1. All financial data in this article were obtained and referenced from Tesla’s annual and quarterly statements which are available in Tesla’s Earnings Releases and Presentations.
2. Featured images in this article are used under creative commons licenses and sourced from the following websites: brx0 and David Davies.
The content in this article is for informational purposes only and is neither a recommendation nor a piece of financial advice to purchase a stock.
If you find the information in this article helpful, please consider sharing it on social media and also provide a link back to this article from any website so that more articles like this one can be created in the future.
Thank you for your help!