How Does Tesla Actually Make Money?

If it seems like you're sharing the road with more and more Teslas (TSLA 12.06%) you're probably not imagining things.

Whether you see its cars on the road, its business strategy in the news, or its CEO in your Twitter feed, Tesla is one of the most buzzed-about companies in the world. But how exactly does it turn a profit?

In this video, we're going to break down exactly how Tesla makes its money, and where it might be headed in the years to come. 

A full transcript follows the video.

Narrator: Tesla didn't invent the electric car -- that actually happened back in 1891. Instead, it did something a lot more interesting -- they made the electric car cool. When Tesla unveiled the Roadster in 2006, it began a wave of change in the auto industry that still continues today-- with virtually every major global automaker now sporting a plan to roll out EVs at volume in the coming years. In 2010, Tesla became the first publicly traded automaker to emerge in the US in 54 years and has delivered incredible returns to shareholders since, building one of the most loved car brands in the world.

Without a doubt, Tesla has changed the face of the car industry, but how does it make money?

In short, they don't. Throughout its history as a public company, Tesla has never been profitable on an annual basis, and has only recorded a few profitable quarters in its history.

However, Tesla has rapidly grown its revenue, booking $21 billion in annual sales in 2018. That's up nearly 7 times in the past 5 years and 183 times since it went public. Today, Tesla generates 93% of its revenues from automotive sales and around 7% from energy generation and storage.

How has Tesla accomplished such staggering growth? They had a plan.

Tesla's master plan entails 4 steps. 1) Create a low volume, expensive, high-end vehicle, 2) THEN Use that money to develop a medium volume car at a lower price, 3) THEN use that money to create an affordable, high volume car, and 4) provide solar power.

Over the course of about a decade, Tesla carried out each step of its master plan one by one, beginning with production of its low volume, high-end Roadster sports car in 2008. 4 years later, Tesla began deliveries of its luxury Model S sedan. Tesla began deliveries of its Model X luxury SUV 3 years later, after several delays. 3 more years after that, Tesla finally introduced it's mass market Model 3 sedan. In January 2019, the Model 3 passed the Model S to become the top selling electric car in the history of the United States.

Meanwhile, in 2016, Tesla merged with SolarCity, completing the 4th prong of its Master Plan and positioning the company to sell its PowerWall energy storage units along with SolarCity solar panels and Tesla vehicles, allowing customers to power their home and vehicles entirely via solar power.

Despite Tesla's incredible growth over the past decade, and the completion of its Original Master Plan, threats still loom on the horizon.

Traditional automakers are aggressively entering the electric vehicle market, particularly on the high end that Tesla has dominated until now, with Audi (AUDVF), Porsche (POAHF 0.22%), Mercedes (MBGA.F -0.04%), Volvo (NASDAQOTH: VOLVY), Jaguar (TTM), and more releasing new vehicles in the coming year. Simultaneously, Tesla has began losing the benefit of US electric vehicle tax credits beginning in 2019. As competition enters the US market with the benefit of the full EV tax credit, Tesla's already unprofitable business will face increasing margin pressure that may impact its ability to continue investing in future growth in a highly capital intensive business like automaking.

Tesla will need to find a boatload of cash over the next few years in order to finance its already announced (and highly anticipated) upcoming projects like the Model Y, Tesla Semi, New Tesla Roadster, solar roof, and construction of the Chinese gigafactory.

In addition, Tesla faces regulatory scrutiny from the SEC, tracing back to CEO Elon Musk's fraudulent tweet that the company had funding secured to go private at $420. That incident, plus another tweet that incorrectly stated future production estimates has regulators watching Musk and Tesla very closely.

At best, the back and forth with regulators is a distraction at a point when the company is trying to secure its dominance of the EV market before competitors are able to enter. At worst, it could eventually rob the company of its CEO and the personification of its brand, potentially derailing its incredible growth story.

Time will tell whether Tesla can overcome these and other significant challenges facing the company today and someday achieve consistent profitability. Regardless, it's indisputable that Tesla has accomplished its goal of accelerating the move to sustainable transport.

Thanks for watching – if you have a company you'd like to see us break down, mention it in the comments section below, and be sure to like the video and subscribe to get more videos like this one from The Motley Fool.