Tesla Operating Expenses And Cost Breakdown Analysis

The interior of a Tesla Model S. Flickr Image.

Most companies incur operating expenses which usually include research and development, rentals, property maintenance, payroll, marketing, advertising, and administrative costs.

It’s no exception for Tesla (NASDAQ: TSLA).

In fact, Tesla has a huge number of operating expenses, totaling more than $7 billion as of 1Q 2023 on a TTM basis.

Apart from the huge numbers, Tesla’s operating expenses have been on tremendous growth in the last few years.

On average, Tesla’s operating expenses on a consolidated basis grew 26% year-over-year since 2016.

Granted, Tesla’s increasing amount of operating cost is taking a big bite out of the company’s profitability.

In fiscal 2022, Tesla’s total operating costs alone consumed as much as 8% of the company’s total revenue.

Keep in mind that this figure has not even taken into account the costs of revenue in addition to the interest expenses as well as taxes that the company may have to pay.

In general, Tesla’s operating expenses are divided into the following 3 major components:

1. Research and development expenses
2. Selling, general and administrative expenses
3. Restructuring and others

In this article, we will look at the numbers and the breakdown as well as the ratio of Tesla operating expense to sales.

Let’s head out to the following topics.

Research and Development Expenses (R&D)

The R&D is a big part of Tesla’s operating expense.

As of 1Q 2023, Tesla’s R&D comprised more than 40% of the total operating expense.

According to Tesla’s financial reports, its R&D expenses consist primarily of personnel costs for teams in engineering and research, manufacturing engineering and manufacturing test organizations, prototyping expenses, contract and professional services and amortized equipment expenses.

Selling, General and Administrative Expenses (SG&A)

Tesla SG&A is another big part of the operating expense.

For example, as of 1Q 2023, Tesla’s SG&A cost comprised nearly 60% of the company’s total operating expense on a TTM basis, a much bigger number than R&D.

However, this ratio has been on a decline, illustrating that Tesla has been cutting down its SG&A cost lately.

According to Tesla’s financial reports, its selling, general and administrative (SG&A) expenses primarily consist of personnel and facilities costs related to stores, marketing and advertising, sales, executive, finances, human resources, information technology and legal organizations as well as fees for professional and contract services and litigation settlements.

Do note that Tesla’s marketing, promotional and advertising costs are part of the SGA or selling, general and administrative expenses.

In the year ended Dec 31, 2022, 2021, 2020 and 2019, Tesla stated that the marketing, promotional and advertising costs have been immaterial, meaning that they have been negligible.

Restructuring and Others

Restructuring and other expenses are related to the following items:

1. Employee termination expenses
2. Losses from sub-leasing a facility
3. Disposal of tangible assets
4. Shortening of the useful life of a trade name intangible asset
5. Impairment losses
6. Court settlement fees

Restructuring costs have only appeared in recent quarters in 2018 and 2019 when Tesla carried out certain restructuring actions such as closing certain stores to reduce costs and improve efficiency.

In short, Tesla’s restructuring costs have been negligible lately.

Tesla’s Operating Expenses (Quarterly)

Tesla’s quarterly operating expense (click image to enlarge)

In terms of the quarterly numbers, Tesla’s operating expenses have been on a significant growth, reaching as much as $1.85 billion as of 1Q 2023, roughly in line with the number reported a year ago.

On average, Tesla’s operating expenses increased by 26% year on year based on the quarterly data since 2016.

At a 26% growth rate, Tesla’s operating cost can easily reach $2 billion per quarter by the end of fiscal 2023 unless the company plans on cutting down its costs.

Tesla’s Operating Expenses (TTM)

Tesla’s TTM operating expense (click image to enlarge)

The TTM plot above smooths out the bumps seen in the quarterly plot and clearly displays the trend of Tesla’s operating expenses on a long-term basis.

On average, Tesla’s operating expenses increased by 26% year on year based on the TTM data since 2016.

As shown in the chart, Tesla’s operating expense grew the most in the early years but the growth remained somewhat muted between fiscal 2018 and 2020.

However, the operating expense growth came roaring back in fiscal 2021 and has been on the rise since then.

As of 1Q 2023, Tesla’s operating expense reached $7.2 billion on a TTM basis, one of a new highs in the past 9 years.

Although operating expenses have reached record highs in 2023, the curve has remained somewhat flat since the beginning of 2022 as shown in the chart above.

In fact, compared to the figure reported a year ago, Tesla’s operating expense reported in 1Q 2023 on a TTM basis has declined by 1%.

Therefore, is Tesla’s operating expense already reaching a plateau in 2023?

Will Tesla’s operating expense remained flat going forward?

Possibly as the company has been reducing the selling price of vehicles in order to gain market share and the price reduction may affect how much operating cost Tesla intends to spend.

Breakdown Of Tesla’s Operating Expenses (Quarterly)

Tesla’s operating expense breakdown (click image to enlarge)

The plot above shows the breakdown of quarterly operating expenses into 3 components.

These components have been briefly mentioned at the start of this article and they are R&D, SGA and restructuring costs.

Restructuring costs have been immaterial.

Granted, Selling, General, and Administrative or SG&A expense makes up the biggest part in most quarters, accounting for roughly 60% of Tesla’s total operating expense.

On the other hand, Tesla’s research and development or R&D spending accounts for about 40% of the company’s total operating cost.

As of 1Q 2023, Tesla’s SG&A cost totaled $1.1 billion while R&D totaled $0.8 billion per quarter.

Therefore, SG&A was nearly 30% higher than R&D cost for Tesla.

Compared to the figures a year ago, Tesla’s SG&A grew slightly while R&D has declined.

Keep in mind that Tesla’s SG&A costs also include the marketing, promotional, and advertising costs as stated in the 2022 annual report.

While Tesla’s SG&A has been the biggest part, its marketing, promotional, and advertising costs have been immaterial.

In other words, Tesla spends relatively low or zero costs on marketing, promotional, and advertising activities.

Instead, the company relies heavily on media coverage and word of mouth as the primary drivers of sales leads.

Breakdown Of Tesla’s Operating Expenses (TTM)

Tesla Operating Expense Breakdown By TTM (click image to enlarge)

The TTM plot above smooths out the bumps seen in the quarterly plot and clearly displays the trend of the breakdown of Tesla’s operating expenses on a long-term basis.

Although the quarterly plot shows that the SG&A increased in 1Q 2023 from a year ago while R&D declined, the TTM plot shows otherwise.

As seen, Tesla’s SG&A of $4 billion reported as of 1Q 2023 on a TTM basis was lower than the $4.5 billion reported a year ago.

On the other hand, Tesla’s R&D of $3 billion reported as of 1Q 2023 on a TTM basis was higher than the $2.8 billion reported a year ago.

Also, Tesla’s SG&A expense has significantly declined since 1Q 2022 and reached a record low as of 1Q 2023.

Therefore, the TTM plot shows that Tesla has cut down its SG&A expense while maintaining or even increasing its R&D spending since the beginning of 2022.

Operating Expense Vs. Total Revenue

Tesla’s operating expense vs total revenue (click image to enlarge)

The chart above shows the comparison between Tesla’s total revenue and operating expense from a trailing 12-month (TTM) perspective.

Granted, the 2 plots shown in the chart are having a huge contrast.

For example, as of 1Q 2023, Tesla’s total revenue totaled $86 billion on a TTM basis while operating costs totaled only $7.2 billion.

Compared to the numbers measured a year ago, Tesla’s revenue has significantly increased while operating expense has gone down, driven primarily by the decrease in SG&A costs.

This scenario represents an advantage for Tesla as it shows that the company’s revenue has grown at a much faster rate than that of operating costs.

Tesla Operating Margin – GAAP

Tesla Operating Margin By TTM (click image to enlarge)

Tesla’s operating margin has significantly improved over the years and reached roughly 14.8% as of 1Q 2023 on a TTM basis.

Compared to the 15% operating margin measured a year ago, Tesla’s 1Q 2023 result was slightly lower.

However, Tesla’s operating margin as of 1Q 2023 grew by a massive 9 percentage points when compared to the result measured in 1Q 2021.

Nevertheless, Tesla’s operating margin is among the highest in the automotive industry according to the 1Q 2023 earnings release.

Tesla’s Operating Expenses to Revenue Ratio (Quarterly)

Tesla’s quarterly operating expense to revenue ratio (click image to enlarge)

The operating expense to revenue ratio measures the changes in operating costs with respect to total revenue expressed in percentage over a period of time.

From the chart, the trend is quite clear that the ratio has been on a downtrend since 2015.

The quarterly ratio was more than 40% back in 2015 but has since declined steadily and hit the lowest level at only 8% as of 1Q 2023.

The declining ratio indicates a somewhat muted operating expense but a surging revenue, which bodes well for Tesla’s investors.

This scenario is again to Tesla’s advantage as it shows that the company’s revenue growth has been much faster than that of operating expense.

Tesla’s Operating Expenses To Revenue Ratio (TTM)

Tesla’s TTM operating expense to revenue ratio (click image to enlarge)

In terms of TTM basis, the downtrend is even more obvious as seen in the chart above.

Since 2015, Tesla’s total operating expense with respect to revenue have declined tremendously.

On a TTM basis, the ratio was at the lowest level at 8% as of fiscal 2023 Q1 despite having a TTM operating expense figure that hit $7.2 billion in the same quarter.

The declining trend of the ratio is good for Tesla and Tesla’s shareholders as it shows a much faster-growing revenue and a slowing operating cost growth.

R&D And SGA Expenses To Revenue Ratio

Tesla’s R&D and SGA expense to revenue ratio (click image to enlarge)

The chart above shows Tesla’s SGA and R&D expenses with respect to total revenue. Again, the chart is plotted on a TTM basis.

The downtrend of the ratio for both expenses, R&D, and SG&A, is also quite clear in the current chart.

As of 2023 Q1, both ratios have declined to their lowest level at 4.7% and 3.5% for SG&A and R&D expenses, respectively.

The declining SG&A and R&D ratios indicates a much faster growth rate of Tesla’s revenue compared to both expenses.

A trend worth pointing out is the narrowing gap between the two types of expenses.

For example, Tesla’s SG&A cost used to have a much higher ratio with respect to revenue while R&D ratio with respect to revenue was notably lower.

However, the gap has been steadily getting narrow as shown in the chart above, indicating the much faster growth rate of the R&D expense compared to SG&A.

As of 1Q 2023, the SG&A expense to revenue ratio was only 1 percentage points higher than the ratio of R&D expense.

Moving forward, Tesla’s R&D expense ratio may possibly be as much as, if not larger, than the SG&A expense ratio.

On an absolute basis, Tesla’s SG&A cost was only about 25% higher than the R&D cost on a TTM basis as of 1Q 2023.

The much faster growth rate of Tesla’s R&D compared to SG&A illustrates the higher priority of the company’s R&D activities compared to SG&A.

R&D And SGA Expenses To Total Operating Cost Ratio

Tesla R&D and SGA To Total Operating Expense Ratio (click image to enlarge)

When it comes to the ratio with respect to total operating expense, Tesla’s SG&A was much higher compared to R&D spending.

As seen, Tesla’s SG&A cost commands a ratio of 56% while the R&D commands a ratio of only 42% as of 1Q 2023.

However, these ratios have been converging as shown in the chart above, meaning that they are getting closer to each other.

For example, Tesla’s SG&A to total operating expense ratio has been on a decline in the last several quarter.

Compared to the ratio reported a year ago, the SG&A ratio has declined by 5 percentage points.

On the flipped side, Tesla’s R&D ratio has moved up by 3 percentage points as of Q1 2023 from a year ago.

Again, the converging ratios reinforce the idea that Tesla’s R&D grows at a much faster growth rate compared to SG&A cost.

In other words, Tesla pays a higher priority to its R&D compared to SG&A expense.

Conclusion

To recap, Tesla’s operating expense has grown much higher over the years.

As of 1Q 2023, Tesla’s operating expense has reached one of the record highs.

While operating expense has been on the rise, Tesla’s operating margin has only been marginally impacted.

As of Q1 2023, Tesla’s operating margin was still at a record high of nearly 15% on a TTM basis, illustrating the much faster revenue growth compared to operating expense.

Similarly, several ratios also point to a similar trend.

For example, the expense to revenue ratio was in a decline, indicating the much faster sales growth.

On the other hand, the expense component such as the R&D spending has increased at a much faster growth rate than SG&A expense as seen in the increasing R&D with respect to total operating expense ratio.

References and Credits

1. All financial figures in this article were obtained and referenced from quarterly and annual filings available in Tesla 4Q 2021 Earnings Release.

2. Featured images in this article are used under the Creative Commons License and sourced from the following websites: Maurizio Pesce and Steve Jurvetson

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