Written by: Nicholas Hyett | Hargreaves Lansdown
Tesla reported third quarter revenue of $13.8bn, a 57% year-on-year increase and modestly ahead of market expectations. Growth was driven by a 58% increase in automotive revenues, to £12.1bn, as overall vehicle deliveries in the quarter rose 73% to 241,391. Reduced revenue per vehicle reflects a change in mix from higher priced Model S/Xs to lower priced Model 3/Ys, as well as a 30% decline in automotive credits.
Operating profits came in at $2.0bn, a 148% year-on-year increase but slightly less than the market had hoped. That was despite setting aside $190m for likely share based payment to Elon Musk in the quarter. The operating margin growth reflects the benefits of increased scale as well as cost reduction. Headwinds in the quarter included lower average sales prices, lower regulatory credit revenue and a $51m bitcoin related impairment.
Capital expenditure in the quarter was $1.8bn, up 81% year-on-year, as the group continues to invest in new factories in Berlin and Texas as well as ramping up production in Shanghai. Free cash in the quarter came in at $1.3bn, versus $1.4bn a year ago.
Tesla finished the half with net cash of $7.9bn, up from $846m.
The group continues to face challenges with semi-conductor shortages, congestion at ports and rolling blackouts that are preventing factories running at full capacity.
Tesla’s share price was broadly flat following the announcement.
Operating profits are slightly behind market expectations, which we put down mostly to a 30% fall in sales of incredibly lucrative regulatory credits. But despite that these are very impressive numbers.
Headwinds ranging from chip shortages to blackouts to port disruption all mean production is probably behind what management had hoped for. But the extra scale has still given Tesla the raw materials to deliver a step change in profitability. Crucially that profitability now looks far more sustainable. Genuine and substantial free cash flow gives the group the firepower it needs to deliver on its ambitious expansion plans for the next few years.
Unfortunately despite all that progress, and what looks like an increasingly bright future, we still struggle with the group’s valuation. A price to earnings ratio of 122 times earnings is off the chart even for a capital light software business. And Tesla is anything but capital light. Depreciation has stepped up 30% year-on-year, and that’s only going to increase as factories age, meanwhile Tesla’s competition is finally getting its act together on electrification. We cannot fault the group’s progress, but whether that justifies a $856bn price tag is another question.