Tesla Surprises with Strong Q3 Earnings; Stock Climb Fuels Excitement

Tesla stock (NASDAQ:TSLA) generated impressive results in Q3 2024, surpassing analysts’ expectations. The company reported a revenue increase of 8% compared to last year, totaling $25.18 billion. Additionally, net income rose nearly 17% to $2.17 billion. Following the earnings report and comments from CEO Elon Musk about potential strong growth next year, the stock surged nearly 12% in after-hours trading. A substantial portion of this growth was driven by regulatory credit sales, along with Tesla’s expanding energy business.

Deliveries and Pricing Trends Impact Earnings

A few key factors contributed to the rise in Tesla’s earnings. Vehicle deliveries reached 462,890 units for the quarter, marking a 6.4% increase from the same period last year and representing the company’s first growth in 2024. Average selling prices dropped to below $40,700 for Q3, down nearly $1,000 from the previous quarter. This decline was influenced by price cuts, a less favorable product mix among the S, X, Y, and 3 models, and heavily discounted financing options. Notably, a significant boost to earnings came from the sale of approximately $739 million in automotive regulatory credits. As an electric vehicle producer, Tesla can sell these credits to traditional automakers that struggle to meet government-mandated zero-emission vehicle sales goals. Estimates indicate that these sales are predominantly profit, bolstering the company’s margins for the quarter. The gross margin for automotive sales improved to 16.4%, up from 15.7% a year earlier, likely due to reduced costs, enhanced scale, and improved revenue recognition with its self-driving software. Read more about Tesla’s recent troubles in China.

Energy Segment Sees Significant Growth

Tesla’s Energy division, encompassing energy storage and solar energy systems, experienced remarkable growth. Revenue surged 52% to $2.38 billion in Q3, driven by robust Powerwall sales and advancements in the rollout of the latest Powerwall 3 and Lathrop Megafactory. Storage deployments increased by 75% year-over-year, further enhancing profitability with the gross margin reaching a record 30.5%, up from 24% last year. Looking ahead, the Shanghai Megafactory is set to begin shipping Megapacks in Q1 2025, which could provide additional sales momentum. The growing demand for energy storage solutions is expected to be fueled by the increased installation of renewable energy sources like wind and solar.

TSLA’s Returns Compared to Market Trends

Over the past four years, TSLA stock performance has been quite volatile. In 2021, returns reached 50%, followed by a drop of 65% in 2022, and a significant rebound of 102% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, comprising 30 stocks, demonstrated much less volatility and has outperformed the S&P 500 each year during the same time frame. What explains this difference? Generally, HQ Portfolio stocks offered better returns with reduced risk compared to the benchmark, avoiding the drastic fluctuations seen in TSLA. Considering the current uncertain macroeconomic landscape—marked by potential rate cuts and ongoing conflicts—could TSLA face challenges similar to those in 2022, potentially underperforming the S&P over the next 12 months? Alternatively, will it experience robust growth?

Future Prospects Amidst Challenges

We believe that Tesla stands to gain from the long-term shift toward cleaner transport and energy production, thanks to its efficient supply chain, cutting-edge battery and drivetrain technology, and leadership in automotive software and self-driving capabilities. Nonetheless, Tesla’s overall delivery figures face headwinds, lagging behind the ambitious goal of 50% annual delivery growth. Factors limiting growth include insufficient charging infrastructure in various regions and declining resale values for electric vehicles, which deter prospective buyers.

Nevertheless, CEO Elon Musk has hinted that a delivery growth of 20% to 30% may be attainable next year. Additionally, a recently unveiled robo-taxi initiative could further contribute to revenues. The company plans to introduce ridesharing services in Texas and California next year, tapping into the expansive ride-sharing market. Learn more about the robo-taxi business with insights from Waymo valued at $5 trillion for Alphabet stock.

Our valuation places Tesla stock at $240 per share, consistent with Thursday’s pre-market price of $239. For further details on Tesla’s valuation and its standing compared to competitors, consult our analysis: Tesla Valuation: Is TSLA Stock Expensive Or Cheap?. For insights into Tesla’s business model and revenue trends, refer to our dashboard on Tesla Revenue: How Does TSLA Make Money?

Market Concerns and Historical Context

As investors hope for a stable U.S. economy, concerns linger about the potential impacts of another recession. Our dashboard, How Low Can Stocks Go During A Market Crash, showcases how key stocks performed during and after the last six market downturns.

[1] Returns as of 10/24/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.