Tesla's Q3 revenue and profits were both lower than expected, with operating profit margins falling to their lowest level since Q1 2021.

According to the Zhongtong Finance APP, on October 18th (Wednesday) after the US stock market closed, Tesla (TSLA.US) released its Q3 2023 earnings report. Despite continued price cuts, Tesla's Q3 revenue and profits fell short of expectations, and the market was particularly concerned about the decline in profit margins. As a result, as of the time of writing, Tesla's stock fell more than 5% after the US market closed on Wednesday.

Revenue and profits fall short of expectations, profit margins decline again

The earnings report shows that Tesla's Q3 revenue was $23.35 billion, a year-on-year increase of 9%, but it fell short of the market's expected $24.06 billion. In terms of business segments, automotive revenue was $19.625 billion, a year-on-year increase of 5%; energy production and storage revenue was $1.559 billion, a year-on-year increase of 40%; service and other revenue was $2.166 billion, a year-on-year increase of 32%.

Under the Non-GAAP accounting standards, net income attributable to common stockholders was $2.318 billion, a year-on-year decrease of 37%, falling short of the market's expected $2.56 billion; diluted earnings per share were $0.66, falling short of the market's expected $0.74, compared to $1.05 in the same period last year.

The gross margin was 17.9%, a decrease of 719 basis points compared to the same period last year, falling short of the market's expected 18% and Q2's 18.2%; the operating margin was 7.6%, a decrease of 964 basis points compared to the same period last year, lower than Q2's 9.6%, the lowest level since Q1 2021. The automotive gross margin, excluding regulatory credits, was 16.3%, falling short of the market's expected 17.7%.

The earnings report shows that Tesla's Q3 car production was 430,488 vehicles, a year-on-year increase of 18%; Q3 deliveries were 435,059 vehicles, a year-on-year increase of 27%, but lower than the record-breaking 466,140 vehicles in Q2, marking the first sequential decline in a year and 20,000 vehicles lower than market expectations.

Tesla summarized some of the factors that affected Q3 revenue and profits in the earnings report. Positive factors include: growth in car deliveries, revenue and gross profit growth from non-automotive businesses, average cost reduction per vehicle, tax credits for electric vehicles from the Internal Revenue Service (IRS), and increased carbon emission regulatory credits from selling electric vehicles. Negative factors include: the impact of a strong US dollar on foreign exchange (a negative impact of $400 million on revenue), car price cuts, factory upgrades, and R&D investment in electric pickup truck Cybertruck and AI projects.

Tesla has significantly reduced the prices of its electric vehicles multiple times this year. Tesla CEO Elon Musk has stated that he is willing to sacrifice the company's industry-leading profit margins to protect sales volume. For example, the price of Tesla's most expensive model, the Model X, has been reduced by more than 30%. This makes it more affordable for consumers struggling in a high inflation and high interest rate environment. Tesla executives have announced that they are preparing to build a new factory in Mexico. Musk stated that the company is working to reduce the price of its electric vehicles before fully establishing the Mexican factory. Musk said, "I am concerned about the high interest rate environment we are in. If interest rates remain high or even increase, it will be much more difficult for people to buy cars."

Musk also added, "The importance of cost cannot be overstated. We must make our products more affordable so that people can afford them." Tesla also stated in its earnings report, "In the third quarter, the sales cost per vehicle was reduced to about $37,500." "Although the production cost of the new factory is still higher than that of the old factory, we have implemented necessary upgrades in the third quarter to further reduce unit costs."

In addition, Tesla's R&D expenses in Q3 were $1.16 billion, higher than the $733 million in the same period last year. The company pointed out that it "has more than doubled the scale of AI training computation to accommodate the growing data set and the Optimus robot project."

When asked about when Tesla might eventually deliver a self-driving taxi or when the software for autonomous driving cars could be safely driven, Musk did not provide a specific timeline. He said, "We are manufacturing and have been manufacturing all cars for some time that are capable of full self-driving."

Cybertruck scheduled for first deliveries at the end of November

In addition, this earnings report also provided news about the electric pickup truck Cybertruck, which is seen as a key driver of Tesla's future growth. According to the plan, the Cybertruck will be delivered in the first batch on November 30th at the Texas factory. Tesla revealed in the earnings report that the Texas factory has started trial production of the Cybertruck and is still on track to begin deliveries within this year.

Musk stated during the earnings conference call that one million people have already pre-ordered the Cybertruck. At the same time, Musk also warned that it would take at least 18 months for the Cybertruck to become a "significant positive cash flow contributor." He also stated that increasing production of the Cybertruck will be "extremely difficult," and the company may not achieve an annual production of 250,000 Cybertrucks until 2025.

Regarding this earnings report, Seth Goldstein, a stock strategist at Morningstar, said, "It is clear that the price reduction has had an impact on profit margins, but this is already known and reflected in the stock price. In addition, the news about the Cybertruck is a welcome relief for this electric pickup truck that has been delayed multiple times."