Following a worse-than-expected second quarter this summer, when Tesla (NASDAQ:TSLA) missed both top- and bottom-line forecasts, investors were watching the automaker's third-quarter update closely on Wednesday afternoon. Specifically, they were looking to see if higher Model 3 deliveries in Q3 compared with Q2 would help or hurt the company's financials.

Tesla delivered -- and then some. Its bottom line swung from a loss in the second quarter of 2019 to a meaningful profit in Q3 as its automotive gross margin strengthened sequentially. In addition, Tesla's free cash flow was far ahead of what analysts were expecting.

Shares are soaring, up more than 20% in after-hours trading on Wednesday as of 6:10 p.m. EDT.

Tesla Model S, Model 3, and Model X

Tesla's Model S, Model 3, and Model X. Image source: Tesla.

Tesla's Q3 results

Third-quarter revenue came in at $6.3 billion, in line with analysts' forecasts but down from revenue of $6.8 billion in the year-ago quarter. Revenue fell despite a 16% year-over-year increase in vehicle deliveries. The decline was primarily due to the introduction of a leasing option for the Model 3. About 6,500 of the cars were subject to lease accounting during the quarter, up from zero in the year-ago period.

Metric

Q3 2019

Q3 2018

Change (Decline)

Vehicle deliveries

97,186

83,775

16%

Net income

$143 million

$312 million

(54%)

Non-GAAP (adjusted) EPS

$1.86

$2.90

(36%)

GAAP = generally accepted accounting principles. EPS = earnings per share. Data source: Tesla quarterly shareholder letters.

Tesla's net income for the period was $143 million, down from $312 million in the year-ago period. Non-GAAP net income in the third quarter of 2019 was $342 million, down from $516 million in the third quarter of 2018.

Despite net income falling on a year-over-year basis, the period's profitability took The Street by surprise. Analysts feared outsize growth in the company's lowest-cost vehicle -- the Model 3 -- would weigh on earnings. Model 3 deliveries accounted for 82% of the quarter's deliveries, up from 67% in the third quarter of 2018. On average, analysts were expecting Tesla to report an adjusted loss per share of $0.42. Yet non-GAAP earnings per share for the period were $1.86.

Highlights

Capturing Tesla's recent operational progress, non-GAAP earnings per share swung from a loss of $1.12 in the second quarter of 2019 to a profit of $1.86. In addition, Tesla's automotive gross margin also improved nicely on a sequential basis, rising from 18.9% in Q2 to 22.8%. Even when excluding the impact of regulatory credits, Tesla's automotive margin improved by 366 basis points.

Free cash flow for the period was $371 million, crushing a consensus analyst estimate for free cash flow of $32 million.

Looking ahead

Going into the year, Tesla said it expected to deliver between 360,000 and 400,00 vehicles, representing 45% to 65% growth. Many investors had doubts as to whether this target was achievable. Yet with just over two months left in the year, the company says it's on track to exceed 360,000 deliveries in 2019.

Importantly, Tesla reiterated that it continues to believe it has grown its business to the point of being self-funding. While management says profits and free cash flow could suffer any time Tesla is bringing new products to market and is ramping up production of those products, it expects to be profitable for the most part from here on out.

Regarding future products, the company said it's expecting to launch its Model Y this coming summer, with limited production of its Tesla Semi coming sometime next year as well.