Tesla's Q3 gross margin continues to decline under the impact of price cuts, while increasing investment in AI, with the Cybertruck pickup truck becoming the focus. | Earnings Report Insights

Despite implementing a price reduction strategy in the third quarter, Tesla's performance for the quarter still fell short of Wall Street's expectations. The continuous impact of price reductions has affected profitability, and the gross margin has continued to decline beyond expectations this year.

However, Tesla revealed two bright spots in its financial performance: first, the use of artificial intelligence (AI) technology to train the robot Optimus, and second, the on-track delivery of the electric pickup truck Cybertruck within this year. Tesla expects to start delivering the Cybertruck at the end of November.

After the earnings report was released, Tesla's stock price fell by about 4.8% on Wednesday and continued to decline after hours, with a decline of over 2% at one point, before rebounding and turning positive.

During the earnings conference call, Tesla CEO Elon Musk also mentioned the Cybertruck, suggesting that it may take a long time to become profitable. He pointed out that increasing production of the Cybertruck will be challenging, and the annual delivery volume expectations are not optimistic. Tesla's stock price resumed its decline after hours, with a decline of nearly 4% at one point.

Revenue growth slows down, EPS profit significantly decreases, gross margin continues to decline

After the US stock market closed on October 18th, Tesla announced that its revenue growth in the third quarter was slower than expected, reaching the lowest growth rate this year. Not only did the earnings per share (EPS) decline for the second quarter this year after the first quarter, but it also decreased significantly beyond expectations:

• Revenue for the third quarter was $23.35 billion, a year-on-year increase of 9%. Analysts expected a year-on-year increase of 12% to $24.06 billion. In the second quarter, revenue reached a record high for a single quarter, with a year-on-year increase of 47%, and in the first quarter, it increased by 24% year-on-year.
• Adjusted EPS for the third quarter, according to non-GAAP, was $0.66, a year-on-year decrease of 37%. Analysts expected a decrease of 29.5% to $0.74. Adjusted EPS for the first quarter also decreased by 21% year-on-year, marking the first year-on-year decline since the third quarter of 2019.

In terms of profitability, Tesla's net profit in the third quarter also significantly decreased beyond expectations. The gross margin has continued to decline in all three quarters this year and has been lower than market expectations.

• Adjusted net profit for the third quarter was $2.318 billion, a year-on-year decrease of 37%. Analysts expected a year-on-year decrease of about 30% to $2.56 billion. Net profit for the second quarter decreased by 3% year-on-year.
• The GAAP gross margin for the third quarter was 17.9%, lower than the expected 18%, a year-on-year decrease of 719 basis points, exceeding the 682 basis points decline in the second quarter, and a quarter-on-quarter decline of about 30 basis points.The earnings report shows that Tesla's operating profit margin in the third quarter was 7.6%, although it decreased by 964 basis points compared to the same period last year, it is still much higher than the industry average in the automotive industry.

Free cash flow in the third quarter is far below expectations, "carbon sales" revenue doubled MoM

Tesla's free cash flow in the third quarter was $848 million, a year-on-year decrease of 74%, a QoQ decrease of 15.6%, which is much lower than analysts' expected $2.59 billion.

Tesla's automotive gross margin in the third quarter was 16.3%, lower than analysts' expected 17.7%, but the revenue from Tesla's major profit driver in the past, "carbon sales", has grown significantly MoM. In the third quarter, Tesla generated $554 million in revenue by selling carbon emission credits, nearly double the revenue in the second quarter, breaking away from the low point reached in the second quarter and hitting a new high since the third quarter of 2021.

Car price reductions continue to impact profitability and revenue, factory upgrades are new factors

In the earnings report, Tesla summarized some factors that affected revenue and profitability in the third quarter. The positive factors include:

Growth in vehicle deliveries, revenue and gross profit from non-automotive businesses, average cost per vehicle decrease, and tax credits for electric vehicles from the Internal Revenue Service (IRS), and growth in carbon emission regulatory credits for selling electric vehicles.

Similar to the second quarter, Tesla once again mentioned negative factors such as the impact of a strong US dollar, car price reductions, R&D investment in electric pickup truck Cybertruck and AI projects, and this time also mentioned factory upgrades. The factors that impacted revenue are:

Excluding the impact of foreign exchange, the average selling price (ASP) of vehicles decreased YoY; foreign exchange had a negative impact of $400 million on revenue, and the negative impact on revenue has decreased for three consecutive quarters.

The factors that impacted operating profit include:

Decrease in vehicle ASP due to pricing; increase in operating expenses for electric pickup truck Cybertruck, AI, and other projects; costs of ramping up production and idle costs related to factory upgrades; impact of foreign exchange.

Continuously reaffirming the production target for this year of 1.8 million vehicles and the long-term target of over 50% growth

Earlier this month, Tesla announced that it delivered 435,059 vehicles in the third quarter, a MoM decrease of 31,000 vehicles, the first decline since the second quarter of last year, and lower than analysts' expected range of 440,000 to 455,000 vehicles. Tesla stated at the time that the MoM decline in deliveries was due to factory upgrades causing shutdowns.When Tesla announced its earnings report this Wednesday, it stated that its goal for the third quarter is still to reduce the average cost per vehicle, generate positive free cash flow, increase deliveries as much as possible, and continue investing in growth projects such as AI. The cost per vehicle sold in the third quarter dropped to $37,500, but the production cost at the new factory is still higher than at the old factory.

Necessary factory upgrades were carried out in the third quarter to further reduce unit costs. "We still believe that a leader in the industry also needs to excel in terms of costs."

Similar to the second quarter, Tesla reiterated its production target of 1.8 million vehicles for this year, with a year-on-year growth rate of over 50%. Tesla stated:

We plan to expand production as soon as possible and remain consistent with the company's target set at the beginning of 2021, which is a compound annual growth rate (CAGR) of 50%. In some years, the company's production growth may be faster, while in other years it may be slower, depending on various factors. In 2023, the company still expects to exceed the long-term CAGR target of 50%, with an annual production volume of approximately 1.8 million vehicles.

AI Training for Optimus Robot Doubled in Scale

In terms of AI development, Tesla stated that software capable of safely executing tasks in the real world is the focus of its AI development work. The company has commissioned one of the largest supercomputers to accelerate its AI development, doubling its computing power compared to the second quarter.

Tesla also provided updates on the progress of training its humanoid robot, Optimus, using AI:

We have more than doubled the scale of AI training to accommodate the growing dataset and the Optimus robot project. Our humanoid robot is currently being trained for simple tasks using AI instead of hard-coded software, and its hardware is being further upgraded.

Cybertruck to Begin Deliveries by the End of November, but May Not Reach 250,000 Deliveries Until 2025

In July of this year, Tesla unveiled its first electric pickup truck, the Cybertruck, at its Gigafactory in Texas. The Cybertruck is the most anticipated model from Tesla this year and is seen as a key driver of future growth, as it heavily relies on the Model 3 and Model Y to boost sales.

In the second-quarter earnings report, Tesla mentioned that equipment installation for Cybertruck production was underway at the Texas Gigafactory and was on track for initial production this year.

In the third-quarter earnings report, Tesla revealed that trial production of the Cybertruck has begun at the Texas factory and is still on track for deliveries to start this year. Tesla also disclosed on its social media platform, formerly known as Twitter, that the first batch of Cybertruck deliveries will take place at the Texas factory on November 30th.Wall Street Journal noticed that in Tesla's global super factory annual production capacity chart, the annotation for the Texas factory for the first time added over 125,000 Cybertrucks and indicated that it is in the trial production stage.

Tesla CEO Musk revealed during the third quarter earnings conference call that there are already 1 million pre-orders for the Cybertruck. At the same time, he warned that it will take at least 18 months for the Cybertruck to become a "significant positive cash flow contributor".

Musk said that increasing production of the Cybertruck will be "extremely difficult". Tesla may deliver 250,000 Cybertrucks per year, but that may not be achieved until 2025.