While Tesla's (NASDAQ:TSLA) plans for its upcoming Model 3 will likely be the main focus when the electric-car maker reports its fourth-quarter results on Wednesday, another area worth checking on will be Tesla's gross profit margin, or its revenue less cost of goods sold as a proportion of total revenue. As Tesla continues to grow its business at a rapid rate, it's important for Tesla to sustain a sufficient gross profit margin to help support its ambitious growth plans, particularly as the company readies its lower-cost, higher-volume Model 3 for a launch later this year.

Ahead of Tesla's fourth-quarter earnings release, here's what we know about Tesla's gross margin metrics for various aspects of its business.

Model X on Tesla's general assembly line in its factory in Fremont, California.

Model X in Tesla's car factory. Image source: author

What has happened with Tesla's gross profit margins?

In recent quarters, Tesla's gross profit margin has been moving steadily upward. But it hasn't yet returned to pre-Model X levels.

TSLA Gross Profit Margin (Quarterly) Chart

TSLA Gross Profit Margin (Quarterly) data by YCharts

Tesla's late-2015 launch of its Model X has weighed on the company's profitability thanks to a slower-than-expected production ramp-up and what management has admitted to be "hubris in adding far too much technology to the Model X in version 1...." 

But Tesla's recent significant progress in its profit margins offers promising signs for the company's ability to benefit from operational leverage as Model X deliveries increase, rising from 2,400 in its first quarter of 2016 to 9,500 in the fourth quarter.

In Tesla's third quarter, total automotive gross margin and gross profit per car increased substantially. Non-GAAP automotive gross margin when excluding benefits from zero emission vehicle credits and the impact of stock-based compensation, was 25%, up 140 basis points sequentially. GAAP automotive gross margin was 29.4%, up from 23.1% in Q2. Tesla said the improvements were driven by improving manufacturing efficiency and higher production volume.

Overall gross margin was 27.7% in Tesla's third quarter, compared to 21.6% in Q2. It was helped by higher zero emission vehicle credits, the company's improving gross margin in its automotive business, and its sequential improvement in its services and other segment (from 2.5% in Q2 to 3.4% in Q3).

What to look for in Q4

For Tesla's fourth quarter, management has said it expects its automotive gross margin, excluding ZEV credits, to be between about 25.1% and 26.1%, or between 23.9% and 24.9% on a non-GAAP basis. Notably, however, since Tesla has already said its fourth-quarter vehicle deliveries were about 3,000 units below its expectations, it's likely Tesla's reported automotive gross profit margin will be near the low end of this guidance range -- or possibly even slightly below it.

A Tesla supercharger location with cars charging in the background.

Image source: Author.

For Tesla's services and other segment, investors should look for a sequential improvement from its 3.4% margin achieved in Q3. Since energy storage products are accounted for in this segment, an expected rise in energy storage deliveries should benefit the segment's gross margin.

Of course, guidance for its gross margin in Q1 and throughout 2017 will likely be just as helpful for investors in gaining more insight into the company's profitability trajectory ahead of Model 3. So, investors should look for an update on what Tesla expects from its gross profit margin in its first quarter and beyond.