Most companies incur operating expenses such as rentals, maintenance, payroll, marketing, advertising, etc to run businesses.
It’s no exception for Tesla (NASDAQ:TSLA).
In fact, some of Tesla’s operating expenses are necessary and unavoidable even if the company does not have any sales or revenue.
For example, the costs of operating a Gigafactory are a huge overhead for Tesla and these are fixed costs that are hard to get rid of.
As a result, the operating expenses are worth examining especially for a company like Tesla (NASDQG:TSLA) where its operating costs not only eat up a large portion of its revenue but also has increased significantly over the last few years (shown in a chart below).
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)
We first look at the overview of Tesla’s total operating expenses on a quarterly basis.
The graph above shows Tesla’s quarterly operating expenses for the past 5 years from 2015 to 2020.
According to the chart, Tesla’s operating expenses increased the most from 2015 to 2017, roughly a 3X increment in those years.
The figure reached a record high at more than $1.2 billion in 2Q 2018 before tapering down in 2019.
Since 2018, Tesla’s operating expenses have stayed at roughly $1 billion per quarter on average and have decreased slightly to $900 million.
However, Tesla’s operating expenses ticked higher again to $1.25 billion in 2020 Q3.
Tesla’s operating costs continued to climb and reached a record high at nearly $1.5 billion in 2020 Q4.
The significant increase in operating costs in the early years and in 2020 shows that Tesla went through major expansions that required significant investment in working capital.
At $1.5 billion per quarter or $6 billion per annum, Tesla’s operating costs took up nearly 30% of its current assets in 4Q 2020 which was valued at about $22 billion in the same period.
Between 2017 and 2019, Tesla has embarked on some cost-saving initiatives targeted on automation and stores closure which saw its operating costs leveling and even declining.
Breakdown of Tesla’s Operating Expenses
The plot above shows the breakdown of quarterly operating expenses into components from 2015 to 2020. These components have been briefly mentioned at the start of this article.
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 total operating expense. Research and development or R&D expense ranks 2nd and accounted for about 1/3 of 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 expense grew the fastest compared to other operating expenses.
Between 2015 and 2020, Tesla’s SGA expense grew more than 400% from $200 million to nearly $1 billion per quarter as of 2020 Q4. During the same period, Tesla’s R&D expense has increased by 200% from about $180 million to more than $500 million.
In 4Q 2020, Tesla incurred an SGA expense of $969 million compared to R&D expense of $522 million 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 installs. 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.
In terms of R&D, Tesla has been quite conservative in the expense. For instance, Tesla’s R&D costs have actually declined and dropped below the $300 million levels in 2Q20, representing a YoY decline of 14%.
However, its R&D expense grew significantly to more than $500 million per quarter in 2020 4Q, representing a YoY growth of more than 50%.
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.
Chart of Tesla Revenue and Operating Costs Comparison
The chart above shows the comparison between revenue and operating expense from a trailing 12-month (TTM) basis. You can see how much revenue has grown with respect to operating costs over the previous 5 years.
The chart shows that Tesla’s revenue has already surpassed $30 billion on a TTM basis as of 4Q20 while the operating cost is still slightly below the $5 billion levels and remained flat for the past several years, suggesting that Tesla has been quite successful at fixing its operating expenses.
Ratio of Tesla’s Operating Expenses to Revenue (Quarterly)
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 14% as of 4Q 2020.
The declining trend indicates both a leveling operating expense and a surging revenue, which bodes well for Tesla’s investors.
At only 14% of revenue, Tesla’s operating expense was the lowest with respect to revenue in 2020 Q4.
Ratio of Tesla’s Operating Expenses to Revenue (TTM)
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 been declining quite tremendously.
On a TTM basis, the ratio was at the lowest level at 15% as of 4Q20 even though the expense figure has hit nearly $1.5 billion on an absolute basis in the same quarter.
The declining trend of the ratio should bode well for Tesla’s investors as it shows a surging revenue with leveling expenses.
Ratio of Tesla’s R&D Expenses and SGA Expenses to Revenue
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 2020 Q4, both ratios have declined to their lowest level at 10% and 5% for SGA and R&D costs, 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 $30 billion in Q4 2020 on a TTM basis, Tesla’s operating costs have remained unchanged at $5 billion.
The gap between revenue and operating expense was at a historical high of $25 billion in 4Q20 from a TTM standpoint.
Again, the declining trend of both the R&D and SGA costs with respect to sales should provide Tesla’s investors the much-needed confidence that the company is on the right track.
Tesla has successfully maintained its operating expense at about $1 billion per quarter or $4 billion on TTM in the last several quarters.
However, those numbers have changed drastically when its expenses shot higher to $1.3 and $1.5 billion in 2020 Q3 and Q4, respectively.
While Tesla may have reported record expenses or costs, the expenses to revenue ratios were an all-time low of 14% and 15% on a quarterly and TTM basis, respectively, as of 2020 4Q.
At the same time, Tesla has successfully grown its revenue that surpassed $30 billion on a TTM basis in 4Q20 while keeping its expenses under control.
In short, Tesla is reaping the results of the investments that were done in the past as reflected in the surging revenue but leveling operating costs.
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.
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