Tesla Focus Shifts To Margins

Can Elon pull through?
Parthi Loganathan
Apr 16 2021
3 min read
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One of the largest criticisms of electric vehicle maker Tesla $TSLA has been its inability to generate meaningful profits. Despite having a large share of the luxury EV market, the company has posted several years of significant losses in its history. New vehicle entrants like Audi e-tron and Ford Mustang Mach-e ($F) post competition to the incumbent. Investors are now hoping that the days of red ink are behind us, which is why the focus must now shift to key margin metrics.


I should point out that I do not have a position in the company. You can see the absence of $TSLA in my portfolio below.

Tesla GAAP and non-GAAP numbers have always varied wildly due to stock-based compensation. That gap has been quite large recently thanks to Elon Musk's large bonus plan hitting a number of tranches in 2020. Analysts primarily use the adjusted numbers, and Tesla delivered $2.24 in adjusted EPS last year. As the graphic below shows, estimates for this year have been rising for more than a year, with the current average of $4.22 up a bit from the $3.98 average seen at the end of last year.


Tesla’s recent move into bitcoin represents an investment of a significant percentage of its cash in the investment. The company had more than $19 billion in cash and cash equivalents on hand at the end of 2020, according to its most recent filing.



The moves raise questions around CEO Elon Musk’s recent behavior on Twitter, where he has been credited for increasing the prices of cryptocurrencies like bitcoin and dogecoin by posting positive messages that have encouraged more people to buy the digital currencies. Observe the volatility of top crypto assets below.



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It will be very interesting to see the margin numbers reported when Tesla earnings come out on Monday, April 26th. While the company did beat estimates for Q1 production and deliveries, there was no production of the Model S or X in the quarter. Elon Musk had said on the Q1 conference call that the refreshed versions of those luxury models were in production already and would be delivered in February, but that obviously did not happen. With these being higher margin vehicles in the past, you would figure overall margins will be hurt.


Q1 also saw sharp rises in key commodity prices like nickel and cobalt, as well as the initial ramp of the Model Y made in China. Tesla skeptics also believe that highly profitable credit sales will fade over time, but it remains to be seen in the short term how much they will contribute. There also were a number of price cuts during the quarter, like for the Model 3 in Japan and a number of European countries. For a time, Tesla also cut prices in the US on the Model Y and also had a much lower priced Standard Range variant that was sold for part of the quarter.


As the graphic below details, Tesla's GAAP automotive gross margins have mostly been in the mid 20s percentage-wise over the past five quarters. Credit sales have helped quite a bit, but don't forget that this is only just part of the business. Tesla's energy business has seen low margins or negative margins in recent periods, and the services/other segment loses plenty of money each quarter. Overall for Q4 2020, the company's total GAAP gross margin figure was 19.23%, nearly 500 basis points below the automotive segment's GAAP gross margin figure.

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