Is Tesla making a profit? This is probably one of the most asked questions among investors.
Profitability is an important factor when it comes to buying a stock for most folks.
A profitable company can pay out a dividend and buy back shares. It’s no exception for Tesla (NASDAQ:TSLA).
That said, we will approach Tesla’s profitability by using a top-down analysis.
In this article, we will first start with Tesla’s gross profitability and subsequently, follow by its operating profitability, pre-tax profitability, net profitability and finally, the earnings per share (EPS).
Bear in mind that the following results are based on the GAAP standard as disclosed in Tesla’s annual and quarterly filings.
Let’s soldier on!
Tesla’s Gross Profitability (Quarterly)
Tesla’s gross profit is measured by taking into account the company’s costs of revenue while excluding other expenses, including research and development and selling, general and administrative (SGA) costs.
Tesla’s cost of revenue comes mainly from material and labor as well as manufacturing overhead, including depreciation costs of tooling and machinery, shipping and logistic costs, warranty, and so on.
According to the chart, Tesla’s quarterly gross profit has been steadily rising between 2015 and 2020, with 3Q 2020 being the best performer when the reported gross profitability totaled slightly above $2 billion.
While Tesla may have achieved a record number in gross profitability in 2020, the journey has not been a smooth sail.
Between 2015 and 2020, Tesla saw some of its quarterly gross profitability dived significantly, on a sequential and year-on-year basis.
However, on a long-term basis, Tesla’s quarterly gross profit has been on a rise.
And that’s what matters the most as it reflects the growth of the company.
Tesla’s Gross Profitability (TTM)
To smooth out the quarterly plot, the trailing 12-months (TTM) plot above was created.
From a TTM perspective, Tesla’s gross profit reached the highest at nearly $6 billion as of 3Q 2020, representing a year on year growth of almost 50%!
Additionally, the TTM plot clearly shows the rising trend of Tesla’s gross profit in the last 5 years and possibly into the future.
While Tesla may have gained profitability in terms of gross income, it does not necessarily mean profitability at the operating and pre-tax income.
Bear in mind that the gross profitability has only taken into account the costs of revenue while leaving out the operating costs and interest expenses.
Let’s move on to find out Tesla’s profitability from operating activities.
Tesla’s Operating Profitability (Quarterly)
The operating profit is another profitability measurement that tracks profitability resulted from core business operations.
In Tesla’s case, the company’s core business operations are related to its core operating activities and that includes the manufacturing, selling and distribution of its automotive and energy products.
For this reason, Tesla’s operating profit is inclusive of expenses such as R&D and SGA aside from the earlier costs of revenue.
Bear in mind that the operating profit still excludes expenses such as interest costs and taxes.
For this reason, the operating profit is also referred to as earnings before interest and taxes or EBIT.
Nevertheless, these expenses – the cost of revenue, R&D and SGA – arrive at what we call the operating expenses of the company.
In other words, these are all the expenses or costs associated with running or operating Tesla’s core businesses.
According to the chart above, Tesla has been operating at a loss in most of the quarterly results, with some of them losing as much as $600 million in a single quarter.
As worst as the results may seem, Tesla’s operating losses have actually been declining over the years and reached consistent operating profitability since 2019.
On an annual basis, Tesla’s operating loss has been reduced to only $69 million in 2019 compared to $388 million and $1.6 billion losses in 2018 and 2017 respectively.
As of Q3 2020, Tesla successfully generated an operating profit of $800 million, representing a year on year increase of more than 100%.
The operating profits which Tesla has consistently achieved throughout 2020 were unprecedented for the company.
Tesla’s Operating Profitability (TTM)
From a TTM perspective, Tesla managed to flip the plot from negative to positive, implying operating profitability since 2020 as seen in the chart above.
Again, the operating profit is a crucial profitability measurement that basically evaluates the operating efficiency of a company.
As mentioned, the operating efficiency lies in Tesla’s manufacturing and retail operations.
Accordingly, Tesla’s operating profit reached a record high of $1.8 billion in 2020 Q3 on a TTM basis.
Throughout 2020, Tesla has managed to achieve consistent operating profitability in 3 consecutive quarters.
The achievement was a major milestone for the company.
Tesla’s Pre-Tax Profit (Quarterly)
Also referred to as the earnings before tax (EBT), Tesla’s pre-tax profit surged to a new high in 2020 Q3 at $555 million on a quarterly basis.
Prior to 2020, Tesla’s pre-tax profits have consistently been in the red, with some quarterly results plunging to as low as $800 million.
However, Tesla managed to turn the business around starting in 2019.
Between 2019 and 2020, Tesla reported 5 consecutive quarters of pre-tax profitability, with 3Q 2020 being the best performer when the reported profit before tax surged more than 100% year over year.
Tesla’s Pre-Tax Profit (TTM)
The profit before tax takes into account Tesla’s interest expenses in addition to all the operating expenses as well as costs of revenues.
From a TTM standpoint, Tesla’s profits before tax have consistently ticked higher throughout 2020 and reached a record high of nearly $1 billion in 3Q 2020.
In other words, Tesla made nearly $1 billion in pre-tax profit in the past 4 quarters as of Q3 2020.
Tesla’s stellar performance in 2020 has mainly been driven by a strong volume of vehicle production and deliveries, particularly after the Gigafactory Shanghai started producing the Standard Range Plus version of Model 3 in 1Q 2020.
Tesla’s Net Profit (Quarterly)
Also referred to as the bottom line or profit after tax, the net profit takes into account all cost of doing business, including interest expenses as well as taxes paid.
In general, the net profit is the profit available to shareholders. A company can make use of the net profit in any way it wants.
For example, the company can re-invest the profits back to the company for expansion, pay down debts or even pay out a dividend.
Similarly, Tesla managed to eke out consistent net profitability, averaged around $100 million, from 3Q19 to 3Q20.
As of 3Q 2020, Tesla’s profit after tax surged to $331 million, representing a year on year increase of 130%!
Tesla’s Net Profit (TTM)
Tesla’s net profit swelled to as much as $550 million in 3Q 2020 on a TTM basis.
Year over year, Tesla turned from being loss-making to profit-making in the latest quarter of 2020.
I foresee that Tesla’s net profitability will increase to a greater high in the coming quarters and in 2021, considering that the Gigafactory Berlin, Germany will be expected to start producing cars as early as 2021.
Tesla’s Earnings Per Share (Quarterly)
Earnings per share are calculated by taking net profit and divide it by shares outstanding.
Bear in mind that the results in the chart above have been adjusted to reflect the 5-to-1 stock split which occurred in 3Q 2020.
According to the chart, Tesla’s diluted earnings per share were in the red in most of the quarters, implying the losses per share that the company has incurred from 2015 to 2019.
However, Tesla has clearly demonstrated profitability improvement in earnings per share when the company successfully reported positive earnings per share in 5 consecutive quarters between 3Q19 and 3Q20.
In Q3 2020, Tesla reported one of the highest quarterly earnings per share of $0.27, a year over year increase of nearly 70%.
Again, I expect to see a significant upside in earnings per share in the near future considering that the highly anticipated Gigafactory Berlin will start producing vehicles for the European market in 2021.
Tesla’s Earnings Per Share (TTM)
On a TTM basis, Tesla’s EPS reached a record high of $0.50 as of Q3 2020, indicating unprecedented profitability for the company since its IPO.
Tesla needs to control its operating expenses and be vigilant in terms of capital expenditures moving forward if it expects a consistent profitability.
As long as Tesla can operating efficiently in the near future and stay on track in expanding its production capacity, I believe Tesla will have more upside not only in earnings per share but also in the stock price.
Of all the profitability charts that we have seen, Tesla has only managed to produce profitability in gross income from 2015 to 2020.
However, Tesla has managed to produce consistent profitability from gross income to earnings per share between 2019 and 2020.
Additionally, Tesla has achieved record profitability in several quarters in 2020, particularly the 3Q 2020.
More upside in profitability is expected in the near future judging from the fact that the Gigafactory Berlin will be ready as early as 2021.
Additionally, the highly anticipated Model Y in which Tesla is producing in several locations around the world will absolutely drive the company’s profitability and subsequently, its stock price higher.
References and Credits
1. All financial figures in this article were obtained and referenced from annual and quarterly statements available in Tesla Annual and Quarterly Results.
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