The question of Tesla’s profitability can be looked at by using a top down approach. In this aspect, we will start from Tesla’s top line which is the revenue and goes all the way down to the bottom line which is the earnings per share.
In between these two ends, there will be the gross profitability, operating profitability and net profitability. These terms will be explained exclusively as we move along with the discussion.
Moreover, when we dive in the question of whether Tesla is profitable, we will look at the company’s results across a spectrum of quarters and preferably, a long-term approach is recommended since Tesla is still relatively a new player in the automotive industry.
With this in mind, what we need to do is to find out the trend of Tesla’s profitability from the perspective of gross profit, operating profit and net profit. In this case, analyzing the trend over a long-term period, be it improving or deteriorating, makes more sense as opposed to digging in the result over a single quarter or two.
So just sit tight and read on to find out more!
Tesla’s Total Revenue
As mentioned, we will first start from Tesla’s top line which is the revenue and the results are shown in the chart above for the past 5 years between 2015 and 2020 on a quarterly basis.
The revenue shown in the chart is the aggregate of all sales from around the world and it includes everything from the sales of electric vehicles to energy products such as solar roofs as well as energy storage systems.
Based on the chart, Tesla’s revenue has been growing almost exponentially between 2015 and 2020 on a quarterly basis, with quarterly revenue hitting record high in 4Q 2019 at $7.4 billion before declining sequentially to $6 billion in 1Q 2020.
In addition, Tesla’s revenue year over year growth has also been entirely positive over the past 5 years, meaning that the company has managed to grow its revenue higher compared to the corresponding quarter in the previous year.
Nonetheless, a growing revenue does not necessarily translate to profitability. In Tesla’s case, there are a lot of expenses and costs associated with the earned revenue. Expenses and costs that range from materials, leases, depreciation, employees salaries to R&D expenditure can eat into Tesla’s profitability and sometimes even exceed the earned revenue.
Profitability comes only when the earned revenue is able to cover all of these expenses and costs. With this said, we will look at Tesla’s next level of profitability which is the gross profit.
Tesla’s Gross Profit
The chart above shows Tesla’s quarterly gross profit over the past 5 years from 2015 to 2020.
Tesla’s gross profit is measured by taking total revenue and minus all the costs associated with the earned revenue. The majority of Tesla’s cost of revenue comes from material and labor as well as manufacturing overhead, including depreciation costs of tooling and machinery, shipping and logistic costs, warranty, and so on.
An important point worth mentioning here is that Tesla’s gross profit does not take into account of research and development (R&D) expenses as well as selling, general and administrative (SGA) expenses as disclosed in the company’s 1Q 2020 quarterly filing.
Nevertheless, Tesla’s quarterly gross profit, as seen from the above chart, has been growing exponentially between 2015 and 2020, with 3Q 2018 recording the highest gross profit at $1.5 billion.
However, Tesla’s gross profit took a dive in 1Q 2019, reaching as low as $566 million before recovering tremendously throughout 2019 and hit record high again in 4Q 2019 at $1.4 billion.
As of 1Q 2020, Tesla reported a gross profit of $1.2 billion, representing a year over year growth of more than 100% compared to the corresponding quarter a year ago.
During the same quarter in 1Q 2020, Tesla’s cost of revenue of $4.75 billion put the company’s gross margin at 21% compared to only 12% in the same quarter a year earlier. In other words, Tesla managed to make a gross profit of roughly 21% in average from the sales of all of its products in 1Q 2020.
On a long-term basis, Tesla’s gross profit has been steadily increasing, with most of the growth occurred between 2018 and 2020 when the company was ramping the Model 3 production and delivery.
To recap, Tesla has been able to make money in terms of gross profit when only cost of revenue was measured while ignoring the rest of the expenses.
Tesla’s Operating Profit
Next, we will look at Tesla’s quarterly operating profit from 2015 to 2020 which is shown in the above chart.
The operating profit is another profitability measurement that is taking into account of all the expenses and costs associated with the earned revenue including expenses like R&D and SGA. Unlike gross profit which measures only cost of revenue, the operating profit takes into account of all costs that range from cost of revenue, R&D to SGA expenses.
Together, these expenses – cost of revenue, R&D and SGA – combine into what we call the operating expenses of the company. In other words, these are all the expenses or costs associated with running the company.
Yet, expenses such as interest and taxes incurred does not fall into the operating costs category and is thus, excluded when measuring the operating profit.
Nevertheless, the operating profit is a crucial profitability measurement that basically evaluates the operating efficiency of a company. In Tesla’s case, the operating efficiency lies in its manufacturing capabilities and retail operation.
Therefore, Tesla’s operating profit is one hell of a measure that tracks everything from raw materials, manufacturing, inventory, to retail sales including shipping and logistics.
If Tesla managed to post a profit from its operation, it represents a gigantic step towards profitability for the company considering the difficulty in squeezing profit out of the long chain of operation.
Unfortunately, Tesla has not been able to consistently earn a profit from its operation as shown in the chart above.
Accordingly, Tesla has been making losses in most of the quarterly results, with some of them even losing more than $500 million within a single quarter. Only a handful of quarters in the chart reported positive operating profits.
As worst as the results may seem, Tesla’s losses have actually been declining over the years. Particularly, Tesla has managed to reduce losses from operation tremendously in recent years since 2018. For instance, Tesla’s operating loss was only $69 million in 2019 compared to $388 million and $1.6 billion in 2018 and 2017 respectively.
As of 1Q 2020, Tesla successfully generated an operating profit of $283 million, representing an operating margin of roughly 5%.
While the 1Q 2020 quarterly result may sound minimal, it represents an important milestone for Tesla as it represents 3 consecutive quarters of operating surpluses since 2019 which is a record for the company since its inception.
In short, Tesla has not been profitable when it comes to operating profitability and has suffered losses exceeding $500 million in a single quarter. The losses had been primarily due to the extra R&D and SGA expenses incurred during the course of the business operation.
Tesla’s Net Profit
The net profit is the final stage in which profit is measured when everything from cost of revenue, R&D expenses, SGA expenses, to interest as well as tax expenses are accounted for.
In general, the net profit is the profit available to shareholders. The company can make use of the net profit in any way it wants. For example, the company can re-invest the profits, if there is a surplus, back to the company for expansion, pay down debts or even pay out a dividend.
Similar to operating profit, Tesla has also not been able to consistently generate positive net profit over the last 5 years as shown in the chart above.
Losses were even worse after interest and tax expenses were taken into account when measuring net profitability.
For instance, total net loss was nearly $2 billion in 2017 on a yearly basis. However, Tesla managed to reduce net loss to about $1 billion in 2018. In 2019, net loss was further reduced to only $862 million which was a slight improvement over 2018.
As worst as the result may sound, Tesla managed to report a net profit of $16 million in 1Q 2020, representing a net margin of less than 1%.
In view of all the losses incurred by the company, Tesla still has a long way to go before it can generate meaningful net profit and return a portion of it back to its shareholders in the form of dividends or share buyback.
Tesla’s Earnings Per Share
Earnings per share is calculated by taking net profit and divide it by shares outstanding.
In general, earnings per share serves 2 purposes in which it reflects (1) Profitability, and set the (2) Share price.
A positive earnings per share basically shows that the company is profitable in the sense that it produces positive net profit. In contrast, a negative earnings per share shows that the company has made a loss.
When we look at Tesla’s earnings per share as shown in the chart above, Tesla has been having negative earnings per share in most of the quarters.
In line with net profit, Tesla’s earnings per share was positive when the company generated positive net profit and vice versa.
An important point worth mentioning here is that earnings per share can change dramatically between 2 consecutive quarters although the company may generate the same amount of profits in both quarters. The reason is that the shares outstanding can change dramatically between the two quarters and thus, affecting the result of earnings per share.
While there is not much to talk about regarding Tesla’s earnings per share since the company has not been profitable, one notable thing worth discussing is that the trend of positive earnings per share has been making rounds more frequently in recent years, indicating that Tesla has indeed been improving its profitability.
In 1Q 2020, Tesla has only managed to generate an earnings per share of $0.08 considering that the net profit made in the same quarter was only $16 million.
In short, Tesla’s profitability analysis in terms of earnings per share shows that the company has been suffering losses as shown by all the negative earnings per share over the years.
Of all the profitability charts that we have seen, Tesla has only managed to produce profitability in gross profit when taking into account of cost of revenue while excluding the rest of the expenses.
When research and development (R&D) as well as selling, general and administrative (SGA) expenses are included when measuring profitability, Tesla’s profitability has gone south throughout most of the quarters.
Although Tesla is not profitable, the company does make some improvements in recent years as seen from the quarterly positive operating profit, net profit and earnings per share produced in 2019 and 2020.
In short, to answer the question of whether Tesla is profitable, the company has only managed to generate a surplus in the form of gross profit. For the rest of profitability analysis as in operating and net profit, Tesla still has a long way to go before being able to consistently profitable in the long run.
References and Credits
1. Financial figures in all charts above were obtained and referenced from financial statements available in Tesla Annual and Quarterly Results.
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