Electric vehicle (EV) maker Tesla (TSLA 7.36%) kicked off third-quarter earnings last week with a rather mixed report. Elon Musk and his team have been battling intense competition both domestically and abroad from rival EV makers such as Rivian, Polestar, Nio, BYD, and even legacy auto manufacturers like Ford and General Motors. A rising number of entrants in the EV landscape, coupled with a stormy macroeconomic environment driven by inflation and high interest rates, has caused Tesla to resort to some pretty drastic measures. Namely, the company has instituted aggressive price cuts in an effort to sell more vehicles and build market share.
The conundrum Tesla faces is that these price cuts have hurt the company's top-line growth while costs are rising. The result? Tesla is generating less profit on a per-vehicle basis.
While this might appear alarming, there are many variables investors should take into account. Let's dig into just how much Tesla's profits are dwindling and how it stacks up against the competition. Investors might find that Musk is still managing a solid operation, and the recent sell-off is an opportunity to buy the dip in Tesla stock.
A look underneath the hood
The table below shows Tesla's revenue, cost, and margin profile on a per-vehicle basis over the last several quarters.
| Item | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 | Q3 2023 |
|---|---|---|---|---|---|
| Automotive revenue | $18,692 | $21,307 | $19,963 | $21,268 | $19,625 |
| Automotive costs | $13,480 | $15,785 | $15,755 | $17,179 | $15,957 |
| Automotive gross profit | $5,212 | $5,522 | $4,208 | $4,089 | $3,668 |
| Total cars delivered | 343,830 | 405,278 | 422,875 | 466,140 | 435,059 |
| Gross profit per delivered vehicle | $15,159 | $13,625 | $9,951 | $8,772 | $8,431 |
Data source: Q3 Company Investor Presentation. Revenue, Costs, and Gross Profit amounts in millions.
There is a lot to unpack in the table above. Investors can clearly see rising costs are outpacing revenue growth. The net result is shrinking profits per vehicle with the metric nearly cut in half over the last year.
My colleague James Brumley provided investors with a fantastic overview of Tesla's unit-level profitability going all the way back to 2019. The main takeaway is that price cuts, inflation, and rising interest rates have become wicked headwinds for Tesla's profitability.
As a silver lining, Tesla's gross profit per vehicle in the the third quarter was only down 4% from the previous quarter. This does not necessarily mean the company has reached a bottom, but it's the smallest sequential decline in the past year. Some factories were also shut down for part of the third quarter, which further impacted deliveries, revenue, and profits.
Image source: Getty Images.
Why this isn't the end of the world
Seeing the profits on a per-unit level can be sobering for longtime Tesla bulls. However, there's a lot of valuable data available for investors to consider when it comes to producing EVs.
Earlier this year, Ford shared with investors that the company is going to lose an estimated $4.5 billion on EVs this year -- up from prior forecasts of a loss of $3 billion. This equates to a loss of $40,000 on a per-unit basis.
The table below illustrates Rivian's per-unit profitability profile over the last year:
| Item | Q2 2022 | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 |
|---|---|---|---|---|---|
| Gross profit per delivered vehicle | ($157,600) | ($139,277) | ($124,162) | ($67,329) | ($32,595) |
Source: Q2 Company Investor Presentation.
While Rivian's per-unit losses are narrowing, the company is still nowhere close to catching up with Tesla.
So even though Tesla is not generating as much profit per unit at the moment, the company is still light-years ahead of the competition. Moreover, long-term investors should consider that eventually, inflation will normalize, and the Federal Reserve will bring down interest rates. In a better market environment, Tesla likely won't need to continue lowering prices in order to sell its cars. As costs come down and revenue growth recovers, profitability should not only rise but eclipse prior levels.
Should you invest in Tesla stock right now?
Take a look at the charts below, and you'll see Tesla stock is trading at some of its lowest valuation levels since the company became consistently profitable.
Data by YCharts.
In this context, Tesla stock looks too good to pass up. Musk spent a good portion of the latest earnings call speaking about the company's artificial intelligence (AI) projects, Optimus and Dojo. While the payoff from these endeavors is years away, the company has plenty of free cash flow to pour back into its business, even as profits take a near-term hit.
Tesla's EV business still outshines the competition, and with the stock taking a breather, long-term investors have a rare opportunity to lower their cost basis or start a new position in this industry leader.
