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Tesla Operating Expenses 2021 and Cost Breakdown

The interior of a Tesla Model S. Flickr Image.

Most companies incur operating expenses, including research and development, rentals, property maintenance, payroll, marketing, advertising, and administrative to operate their businesses.

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

In fact, Tesla has a huge number of operating expenses, totaling as much as $6 billion as of 2Q 2021 on a TTM basis.

Unfortunately, Tesla’s operating expenses have been on a rise in the last few years, growing on an average of 30% year-over-year since 2016.

This huge sum of operating costs has taken a toll on Tesla’s profitability.

For example, as of 2Q 2021, Tesla’s operating costs have eaten up as much as 14% of the company’s total revenue.

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

As a result, investors should watch for Tesla’s operating expenses from time to time to make sure that they do not get out of hand for the company.

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

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

Research and Development Expenses (R&D)

Tesla’s research and development 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 (SGA)

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

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 cost and improve efficiency.

Tesla’s Operating Expenses (Quarterly)

Tesla's quarterly operating expense

Tesla’s quarterly operating expense

* Quarterly operating expense data is extracted directly from the company’s income statements.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

We first look at Tesla’s total operating expenses on a quarterly basis.

The graph above shows Tesla’s quarterly operating expenses for the past 5 years from fiscal 2015 to 2021.

According to the chart, Tesla’s operating expenses have been on a rise, reaching as much as $1.6 billion as of 2Q 2021 on a quarterly basis.

Since 2016, Tesla’s operating expenses have increased on an average of 30% year on year.

Although Tesla’s operating expense has been on a rise, it stayed nearly flat from fiscal 2017 to 2020 at about $1 billion per quarter.

Going into fiscal 2021, Tesla’s operating expense rose again and exceeded $1.5 billion for the 1st time in the company’s history.

At the 30% average growth rate, Tesla’s operating cost will reach $2 billion per quarter by fiscal 2022.

Tesla’s Operating Expenses (TTM)

Tesla's TTM operating expense

Tesla’s TTM operating expense

* TTM operating expense data is calculated by the author based on the sum of the quarterly data on a trailing 12-month or 4-quarter basis.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

The TTM plot above clearly displays the trend of Tesla’s operating expense on a long-term basis.

As seen, Tesla’s operating expense grew exponentially in the early years but the growth stalled between fiscal 2018 and 2020.

In fiscal 2021, Tesla’s operating expense growth came back and was seen rising significantly since the end of 2020.

As of 2Q 2021, Tesla’s operating expense reached $6 billion on a TTM basis, a record high for the company.

Breakdown of Tesla’s Operating Expenses

Tesla's operating expense breakdown

Tesla’s operating expense breakdown

* Operating expense breakdown is extracted directly from the company’s income statements.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

The plot above shows the breakdown of quarterly operating expenses into mainly 2 components from fiscal 2015 to 2021.

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

As seen from the chart, Selling, General and Administrative or SGA expense made up the biggest part of Tesla’s operating costs in most quarters, accounting for over 2/3 of the company’s total operating expenses.

On the other hand, research and development or R&D expense accounts for about 1/3 of the company’s total operating cost.

Restructuring and Other expenses existed in only a few quarters in 2018 and 2019 and have been insignificant. According to Tesla, restructuring and other expenses were primarily due to one-time employee termination fees, losses from sub-leasing facility, disposal of certain tangible assets and contract termination carried out to reduce costs and improve efficiency.

Over the last 5 years, SGA expenses grew the fastest compared to other operating expenses.

Between fiscal 2015 and 2021, Tesla’s SGA expense grew 34% on average year-on-year. During the same period, Tesla’s R&D expense increased 26% on average year-on-year, slightly below that of the SGA expense.

As of 2Q 2021, Tesla’s SGA expense reached nearly $1 billion compared to R&D expense of $600 million reported in the same quarter.

Both SGA and R&D expenses are fixed costs that Tesla will incur no matter how many cars the company delivers or how many batteries the company sells.

These costs are relatively difficult to get rid of since they are related to engineering personnel and buildings as well as equipment maintenance.

These are important assets to the company which need to be maintained from time to time. The restructuring plan that the company has carried out was meant to reduce some of these costs.

While SGA expenses are a must, R&D expenses are much more important and will provide Tesla the much-needed competitive advantages to dominate in the all-electric vehicle race.

Operating Expense Vs. Total Revenue

Tesla's operating expense vs total revenue

Tesla’s operating expense vs total revenue

* Both operating expense and total revenue are plotted on a TTM basis.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

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

At first glance, the 2 plots shown in the chart are creating a huge contrast.

For example, Tesla’s total revenue has already surpassed $40 billion on a TTM basis as of fiscal 2021 Q2 while the operating cost was only slightly above $5 billion.

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

Ratio of Tesla’s Operating Expenses to Revenue (Quarterly)

Tesla's quarterly operating expense to revenue ratio

Tesla’s quarterly operating expense to revenue ratio

* Ratio is calculated by the author based on the quarterly data.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

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 declined over the last 5 years.

The quarterly ratio was 40% back in 2015 but has since declined steadily and hit the lowest level at only 13% as of 2Q 2021.

The declining trend of the ratio indicates a leveling 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 expenses.

Ratio of Tesla’s Operating Expenses to Revenue (TTM)

Tesla's TTM operating expense to revenue ratio

Tesla’s TTM operating expense to revenue ratio

* Ratio is calculated by the author based on the TTM data.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

To smooth out the curve, I created the TTM (trailing 12-months) chart which is shown above.

The downtrend is even more obvious in the current chart.

Over the last 5 years, Tesla’s expenses with respect to revenue have declined quite tremendously.

On a TTM basis, the ratio was at the lowest level at 14% as of fiscal 2021 Q2 despite having an operating expense figure that hit nearly $6 billion.

The declining trend of the ratio is good for Tesla and Tesla’s investors as it shows a surging revenue but a leveling operating expense.

R&D And SGA Expenses To Revenue Ratio

Tesla's R&D and SGA expense to revenue ratio

Tesla’s R&D and SGA expense to revenue ratio

* Ratio is calculated by the author based on the TTM data.
* Tesla’s fiscal year begins on Jan 1 and ends on Dec 31.

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

The downtrend for both expenses, R&D and SGA, is also quite clear in the current chart.

As of 2021 Q2, both ratios have declined to their lowest level at 9% and 5% for SGA and R&D expenses, respectively.

Both ratios seem to be declining at about the same rate.

Nevertheless, the trend in the current chart reinforced the idea that Tesla’s revenue has outgrown operating costs by a very large margin.

While revenue has surged past $40 billion in Q2 2021 on a TTM basis, Tesla’s operating costs have only gone slightly above $6 billion.

The gap between the revenue and operating expense was at a historical high of more than $30 billion as of fiscal 2021 2Q.

Again, the declining trend of both the R&D and SGA costs with respect to total sales is good for Tesla.

Conclusion

Tesla had successfully maintained its operating expense at about $1 billion per quarter or $4 billion on TTM basis for a number of years in the past.

However, those numbers have slowly crept higher going into fiscal 2021 and reached as much as $1.6 billion as of 2021 Q2 on a quarterly basis.

In the same quarter, Tesla’s TTM operating expense reached nearly $6 billion as of Q2 2021, a new high for the company.

On average, Tesla’s operating expense grew 30% year-on-year since fiscal 2016, led primarily by SGA expenses which grew at an average of 34% during the same period while R&D’s average growth rate was around 26%.

Although Tesla’s operating costs have ticked higher, the ratio of operating expense to revenue has been on a decline and reached as low as 14% as of 2Q 2021.

This scenario indicates that Tesla’s revenue has grown at a much faster rate than that of operating cost and it is good for the company as Tesla has been able to maintain its operating expenses.

References and Credits

1. All financial figures in the charts in this article were obtained and referenced from quarterly and annual filings available in Tesla Stock Information.

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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Disclosure

The content in this article is for informational purposes only and is neither a recommendation nor a piece of financial advice to purchase a stock.

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