Most companies have some operating expenses, such as research and development, rentals, property maintenance, payroll, marketing, advertising, and administrative costs.
It’s no exception for Tesla (NASDAQ: TSLA).
Tesla’s operating expenses hit a record figure of $8 billion as of 3Q 2023 on a TTM basis.
Over the past several years, Tesla’s operating expenses have grown tremendously.
On average, Tesla registered a year-on-year growth rate of 25% for its operating expenses since 2016.
As a result, Tesla’s increasing amount of operating cost is taking a toll on the company’s profitability.
In fiscal 2022, Tesla’s total operating cost consumed nearly 9% of the company’s total revenue, and operating margin has considerably declined in fiscal 2023, primarily driven by the growing cost of doing business.
Keep in mind that this figure has not even taken into account the costs of revenue in addition to interest expenses as well as taxes.
In general, Tesla’s operating expenses are divided into the following three major components:
1. Research and development expenses
2. Selling, general and administrative expenses
3. Restructuring and others
In this article, we will look at several statistics, including the total operating expense, the breakdown of operating costs, several ratios, and the growth rates.
Let’s look at more details, starting with the table of contents below.
Research and Development (R&D)
R&D is a big part of Tesla’s operating expenses.
Tesla invests in R&D to enhance and develop new products to remain competitive and stay ahead in the EV race.
As of 3Q 2023, Tesla’s R&D comprised nearly 45% of the total operating cost.
Tesla’s R&D expenses primarily consist 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)
SGA is another aspect of Tesla’s operating costs.
Tesla spends a considerable amount of resources on SG&A.
As of 3Q 2023, Tesla’s SG&A comprised 55% of the company’s total operating expense, even higher than that of R&D.
However, this ratio has declined in recent years, illustrating the higher priority of R&D over SGA for Tesla.
Tesla’s SGA primarily consists of personnel and facilities costs related to stores, marketing and advertising, sales, executive, finances, human resources, information technology, legal organizations, and fees for professional and contract services and litigation settlements.
Do note that Tesla’s marketing promotional and advertising costs are part of the SGA expenses.
In the year ended Dec 31, 2022, 2021, 2020, and 2019, Tesla stated that its marketing, promotional, and advertising costs had been immaterial, meaning that Tesla’s spending on marketing, promotional, and advertising had 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 only appeared in certain quarters in 2018 and 2019 when Tesla carried out specific restructuring actions, such as closing certain stores to reduce costs and improve efficiency.
In short, Tesla’s restructuring costs have been negligible lately.
Operating Expenses By Year
Tesla incurred $7.2 billion of total operating expenses in fiscal 2022, roughly in line with the $7.1 billion reported in fiscal 2021.
Compared to fiscal 2020, Tesla’s $7.2 billion operating expenses reported in 2022 rose 56%.
Since 2015, Tesla’s operating expenses have risen by 350% or 50% per year on average over the past seven years.
Operating Expenses By Quarter
Tesla’s quarterly operating expenses reached as much as $2.4 billion as of 3Q 2023, a record figure and 40% higher than the same quarter a year ago.
A noteworthy trend is that Tesla’s operating expenses have consistently increased without any signs of decline.
In the fiscal year 2023, Tesla’s operating expenses experienced a significant increase.
Operating Expenses By TTM
The TTM plot above smooths out the bumps seen in the quarterly plot and displays the rising trend of Tesla’s operating expenses on a long-term basis.
On average, Tesla’s operating expenses increased by 25% year-on-year based on the TTM data since 2016.
As of 3Q 2023, Tesla’s operating expenses reached $8.3 billion on a TTM basis, a record figure since 2015.
Compared to the same quarter a year ago, Tesla’s 3Q 2023 result was up 9% year-on-year.
Again, the TTM plot shows that the operating expenses of Tesla in the fiscal year of 2023 experienced a significant increase.
Growth Rates Of Operating Expenses By TTM
Tesla’s operating expenses experienced a significant increase during the COVID-19 pandemic but have much lower growth in post-pandemic periods, as seen in the much smaller growth rates in post-pandemic periods in 2023.
Breakdown Of Operating Expenses By Quarter
The plot above shows the breakdown of the quarterly operating expenses into three components.
These components have been briefly mentioned at the start of this article, and they are R&D, SGA, and restructuring costs.
I have excluded the restructuring costs as they were found to be insignificant.
As of 3Q 2023, Tesla’s SGA constituted the most significant portion, amounting to $1.25 billion.
During the same period, Tesla spent $1.16 billion on R&D, making it the second-largest expense after SGA.
Tesla’s selling, general, and administrative expenses (SG&A) have been its most significant cost.
However, the company spends little or no money on marketing, promotion, and advertising.
This implies that Tesla’s marketing and advertising costs are relatively low.
Instead, the company depends heavily on media coverage and word of mouth to generate sales leads.
Breakdown Of Operating Expenses By TTM
The TTM plot smooths quarterly bumps and displays Tesla’s long-term opex trend.
As seen, Tesla’s SGA expense is much higher than R&D expense.
In fiscal 3Q 2023, Tesla’s SGA expense of $4.6 billion was nearly $1 billion higher than the R&D expense of $3.7 billion reported in the same period.
Although both expenses had decreased slightly in 2022, they significantly increased throughout 2023.
Operating Costs Vs. Total Revenue
The two plots shown in the chart above have a stark contrast, with revenue growing much faster than operating costs.
For example, as of 3Q 2023, Tesla’s total revenue reached $96 billion, while operating costs totaled only $8.3 billion.
Compared to a year ago, Tesla’s revenue increased by 28%, while operating expenses only grew by 9%.
This scenario indicates a strategic advantage for Tesla, as its revenue has grown faster than its operating costs.
Operating Costs Vs. Total Revenue In Growth Rates
Overall, Tesla’s revenue growth is still much better than the growth of operating expenses.
In most quarters, Tesla’s revenue growth is above the plot of operating expenses, implying much faster revenue growth rates than operating expenses.
Operating Margin – GAAP
Although the operating margin has been on the rise on a long-term basis, it may have reached the peak in fiscal 2022 at 16.8%, reported in fiscal 4Q 2022, thanks to the significant increase in operating costs in fiscal 2023.
Since 2023, Tesla’s operating margin has declined and reached only 11.2% as of 3Q 2023.
This is much lower than the 16.5% measured a year ago.
Operating Expenses To Revenue Ratio
As of 3Q 2023, Tesla’s operating expenses to revenue ratio topped 8.6%, up slightly over the prior quarter but remained considerably lower than the 10.1% recorded in the same quarter of the previous year.
This indicates that Tesla’s revenue grew faster than its operating expenses, which is positive for shareholders.
The operating expenses to revenue ratio has significantly declined in the long term.
Again, the declining operating expenses to revenue ratio suggests that revenue growth rates should be much higher than operating costs.
R&D And SGA To Revenue Ratio
The ratios of SGA and R&D to revenue will probably converge at the same point soon.
It is possible that Tesla’s R&D will be as large as or surpass the SGA someday.
R&D And SGA To Total Operating Expenses Ratio
As of 3Q 2023, Tesla’s SGA made up 55% of the total operating expenses, while R&D made up nearly 45%.
Therefore, Tesla’s SGA still accounted for most of the company’s total operating expenses.
However, the ratio of SGA has decreased significantly while the R&D ratio has increased, indicating the increasing priority for R&D over SGA.
Tesla’s growing operating expenses are negatively impacting the operating margin.
Although the operating costs of Tesla are rising, the company’s revenue growth remains significantly higher.
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References and Credits
1. All financial figures presented in this article were obtained and referenced from Tesla’s SEC filings, investor update letters, quarterly and annual reports, etc., which are available in Tesla Investor Relations.
References and examples such as tables, charts, and diagrams are constantly reviewed to avoid errors, but we cannot warrant the total correctness of all content.
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