Every quarter, Tesla short sellers anticipate negative data, while EV bulls pray for positive results. This quarter, it seems that the bulls win again as TSLA announces positive results across the board and surpasses expectations.
Q3 2020 represents the fifth consecutive quarter of profits for Tesla, which seems to shrug off both recession and pandemic with each press release.
Analysts are split on what is most meaningful in this report, though all of them agree on one thing:
Tesla is on its way up in the short-term.
There are four areas of TSLA’s Q3 Earnings Report that are most important to watch; continue reading to learn exactly what they are:
1. Production Update
Elon Musk has touted a goal of 500,000 EVs produced throughout 2020 for some time now and, with the world in its current state, this goal was looking like a dream to many analysts; however, Tesla somehow managed to exceed all expectations and report a record quarter for vehicle deliveries. This increase was likely driven by higher sales of the Model 3 in China as Tesla scales up production at its Shanghai factory, as well as the introduction of the Model Y compact SUV, introduced earlier this year.
With 139,300 vehicles delivered during this quarter, Tesla has surpassed all previous quarterly deliveries, showcasing the efficiencies that the company is finding throughout their supply chain. While Musk’s pre-COVID expectations were that the company would easily surpass 500,000 vehicle deliveries this year, a more realistic approach has been taken in light of the global crisis.
While this number is extremely impressive, it also means that, in order to meet the half-million delivery goal, Tesla must produce and deliver more than 180,000 vehicles in Q4 alone.
With cost control and supply chain changes the focus of Tesla’s Battery Day, many investors and analysts were looking to this report as an interim update on the implementation of these changes. While increased profitability is typically received as a good thing, it’s important to understand just how these increased profits are being attained.
For TLSA, this quarter represents massively increased operating expenses – which have increased 33% from last quarter – and thus, decreased profitability. At first glance, this may seem irreflective of the company’s goals, however, it would be short-sighted to come to that conclusion.
For Tesla to implement the changes it desires and vertically integrate their supply chain (bringing battery production in-house), they need to spend their earnings on developing new factories, expanding engineering teams, and setting up new systems to prepare for production.
Profitability will continue to be a major factor to watch over the short- and mid-term of the company.
3. Earnings–per–Share (EPS)
As debatably the most highly contested stock on the market, Tesla’s EPS is a key argument piece for those who believe that the stock is overvalued in the market. For the past decade, TSLA has consistently produced a negative annual EPS, though it’s looking likely that this year will be the turning point.
2020 has shown continued success for Tesla with their EPS in positive territory quarter-over-quarter. The trend continues upwards with TSLA’s adjusted earnings-per-share increasing to $0.76 for the quarter. While this is still quite low compared to competitors in the industry, many investors are willing to place decreased importance on this figure, in favour of growth potential.
4. Tax Credit Sales vs Vehicle Sales
For quite some time now, Tesla has had what some call an “excessive dependence on tax credit sales”, generating a large portion of its income from selling its unused carbon-emission tax credits to rival businesses. This poses a problem for investors as, naturally, this means that TSLA’s revenues are not based on vehicle sales but instead, from government subsidies.
In Q2 of 2020, Tesla generated $428M of their total $6.04B revenue by selling these highly profitable credits, representing roughly 7% of their overall revenues, leading some bearish investors to claim an over-dependence.
In Q3, Tesla reported that $397M of their $8.77B total revenue came from tax credit sales, representing roughly 4.5% of total revenue. While the dollar value of tax credit sales is higher than previous expectations, the percentage of total revenue decreasing represents less reliance on them for profitability.