Tesla: Navigating a Critical Juncture Despite Record Revenue

Written by: Sophie Lund-Yates | Hargreaves Lansdown

  • Third quarter revenue rose 55.9% to a record $21.5bn, with Automotive revenue rising to $18.7bn from $12.1bn the previous year. The increase reflected a year-on-year increase of 102,439 vehicle deliveries and an increase in average selling prices. There were significant increases in production across all vehicle types
  • Operating expenses remained flat at $1.7bn, but the group acknowledged it’s experiencing raw material cost inflation. Operating profit rose to $3.7bn, up from $2.0bn the previous year
  • Tesla’s hoping to reduce costs-per-vehicle by improving its delivery logistics. High delivery volumes are currently causing challenges with transportation capacity. The group also said it believes “battery supply constraints will be the main limiting factor to EV market growth in the medium and long terms”
  • Tesla shares fell 3.9% in after-hours trading 

Decades-high inflation, rising energy bills in Europe and signs of a weakening China market were all blinking alarms heading into Tesla’s quarterly results. We’re seeing that the strength of the group’s brand is holding it steady in times of deep economic uncertainty.

With all that said, there are challenges just up the road. We’re yet to understand how deep an oncoming recession will be, and it has the potential to shake Tesla’s chassis. There is a limit to how far prices can go without volumes falling. Tesla’s starting price is a lot for the average person to spend on a car at the moment, especially when you consider the rapid weakening of US consumer spending power. US personal savings rates are aiming for the floor, while borrowing rates are spiking. This is likely to have serious ramifications for the automotive market, and even Tesla’s more reasonably priced models will be out of reach for many in just a few short months. Tesla is, as yet, untested in the face of sharp economic contractions, so while an immediate drop in demand is unlikely, it’s very hard to see how the group won’t face obstacles as economic conditions worsen. 

There’s also the question of enormous competition in the EV market, with rivals in China like BYD an especially cumbersome rival. This is the critical juncture Tesla must navigate, which won’t be made an easy task given there’s already a lot on the do-to list. Among these is steering the company through ongoing supply chain problems and less-than-slick delivery logistic bottlenecks. The group made 22,000 thousand more cars than it delivered last quarter, and inventory backlogs are not a friend to the automotive industry. 

Recent performance is not to be knocked, and Tesla has a habit of surprising us, but all eyes will be laser focused on what could turn out to be fickle demand in the near-term. It's not lost on investors that Tesla needs to pull off an exceptional final quarter if it wants to hit its target of 50% average delivery growth. Failure to do so could see further pressure heaped on the group's already downtrodden valuation.

Related: TSLA: Tesla Misses Delivery Estimates in Q3 of 2022