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Tesla’s GAAP Margins Reached Record Highs

Electric vehicles for hire. Source: Flickr Image

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 significantly generated positive free cash flow in 2020.

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 margin and some non-GAAP margins.

Therefore, let’s move on!

Tesla’s Gross Margin

Tesla gross margin

Tesla gross margin

* Gross margin is a GAAP measure and is computed by the author using Tesla’s TTM revenue and TTM gross income.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.
* Tesla’s revenue and gross income are extracted from the company’s consolidated income statements.

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 has been quite stable in the last 5 years, averaging around 20%.

Tesla used to have a higher gross margin at nearly 25% back in 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 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 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 should explain 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.

As of 4Q 2020, Tesla’s gross margin totaled as much as 21%, a new high for the company since 2018.

For your information, Tesla’s Model 3 and Y production reached more than 100,000 vehicles per quarter in 2020.

Tesla’s Operating Margin

Tesla operating margin

Tesla operating margin

* Operating margin is a GAAP measure and is computed by the author using Tesla’s TTM revenue and TTM operating income.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.
* Tesla’s revenue and operating income are extracted from the company’s consolidated income statements.

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 dived 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 2019, Tesla managed to break even from an operating perspective with an operating margin that hovered around 0.0%.

Tesla’s breakthrough came in 2020 when its operating margin soared and reached slightly more than 5% as of 2020 Q4.

Tesla achieved a positive operating margin on the back of half a million vehicle deliveries in 2020.

Tesla’s Net Margin

Tesla net profit margin

Tesla net profit margin

* Net margin is a GAAP measure and is computed by the author using Tesla’s TTM revenue and TTM net income.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.
* Tesla’s revenue and net income are extracted from the company’s consolidated income statements.

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 even lower than the operating margin when extra costs such as taxes and interest expenses are taken into consideration.

Tesla only managed to achieve a net profit margin of 2% as of 4Q 2020.

Prior to 2020, Tesla’s net margin had been mostly in the red, indicating that the company had been incurring losses.

While Tesla had suffered losses, it also had made significant improvements to its operations.

In 2020, Tesla’s net margin finally made it into the black, indicating that the company has finally made a profit on a GAAP basis.

While the net profit margin may only be a few percent, it marked a significant milestone for Tesla.

Tesla’s EBITDA Margin

Tesla EBITDA margin

Tesla EBITDA margin

* EBITDA margin is a non-GAAP measure and is adjusted by Tesla where certain non-cash expense items are excluded.
* EBITDA margin is calculated by the author using Tesla’s TTM revenue and TTM adjusted EBITDA.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.

The EBITDA is the net cash prior to the 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.

That said, Tesla’s EBITDA margin has been in the black and is seen rising over the last 5 years.

There is a similar pattern observed in Tesla’s EBITDA margin where there was a notable dip in the margin in 2018.

This pattern exists in Tesla’s other margins as well.

As mentioned, Tesla was massively ramping its Model 3 production between 2017 and 2018.

During this period, Tesla was burning cash and incurring expenses aggressively and this had led to the dip in the company’s margins.

However, Tesla’s EBITDA margin was seen rising since 2018 and reached a record high at 18% as of 2020 Q4.

When Tesla’s Model 3 deliveries rose, so did the company’s EBITDA margin.

At an EBITDA margin of 18%, Tesla generated about $0.18 dollars of cash out of $1.00 dollars of revenue.

Tesla’s Gross Margin Without Regulatory Credits

Tesla gross margin without regulatory credits

Tesla gross margin without regulatory credits

* Gross margin without regulatory credit sales is a non-GAAP measure and is calculated by the author using Tesla’s TTM revenue and TTM gross income excluding regulatory credits sales.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.

For your information, Tesla gets a part 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 EVs 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 totaled 21% in Q4 2020 with regulatory credit sales.

Without regulatory credits revenue, Tesla’s gross margin decreases to only 16% in the same quarter.

Tesla’s regulatory credits sales boosted its gross margin by as much as 5% in 2020 4Q, the largest ever reported.

As seen in the chart, the gap between the gross margins with and without regulatory credits sales actually diverges when the plot moves closer to the current quarter.

The gap between the gross margins was much smaller back in 2018, which was only about a 2% difference.

Tesla’s Operating Margin Without Regulatory Credits

Tesla operating margin without regulatory credits

Tesla operating margin without regulatory credits

* Operating margin without regulatory credit sales is a non-GAAP measure and is calculated by the author using Tesla’s TTM revenue and TTM operating income excluding regulatory credits sales.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.

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 closer to the latest quarter, meaning that Tesla’s regulatory credits sales have been increasingly getting larger.

As of 4Q 2020, Tesla’s operating margin totaled only 1.3% when revenue from emission credits is excluded.

In other words, Tesla’s carbon credits sales boosted its operating margin by 5 percentage points in 4Q 2020.

Tesla’s Net Profit Margin Without Regulatory Credits

Tesla net margin without regulatory credits

Tesla net margin without regulatory credits

* Net margin without regulatory credit sales is a non-GAAP measure and is calculated by the author using Tesla’s TTM revenue and TTM net income excluding regulatory credits sales.
* TTM data consists of the sum of the quarterly data on a trailing 12-month or 4-quarter basis.

In terms of net profit margin, Tesla’s figures dive to the red without regulatory credits sales.

In other words, Tesla would not have been profitable without the help from the sales of carbon credits.

For instance, Tesla’s net profit margin plunges to nearly -3% in Q4 2020 when we exclude regulatory credits revenue in the same quarter.

Understandably, Tesla generated only a small profit in Q4 2020 with a 2% net margin, a substantially tiny figure.

Therefore, without the numbers from emission credits revenue, Tesla would be having losses.

Similarly, Tesla’s net margin with and without regulatory credits sales are diverging the closer they get to the latest quarter, meaning that Tesla generated a substantial amount of revenues from carbon credits sales in recent quarters.

Conclusion

Tesla was seen making losses prior to 2020 with margins being mostly in the negative regions.

Tesla has made tremendous progress in the last 5 years in terms of vehicle production and deliveries.

Tesla’s margins are seen expanding as of the recent quarters and the company achieved multiple record highs in margins.

More importantly, Tesla’s net profit margin finally made it into the black in 2020, signaling that the company made its 1st profit since its inception.

While Tesla has made its 1st profit, the company would not have done it without the sales from regulatory credits.

Tesla would definitely not be profitable without taking into consideration its regulatory credits sales.

References and Credits

1. All financial data in this article were obtained and referenced from Tesla’s annual and quarterly financial statements which can be found in Altria’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.

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