Although Tesla’s (TSLA) latest financial report shows its revenue hitting a record high, a closer look at the data reveals that this electric vehicle giant might be on the verge of losses. The earnings report released last Wednesday almost entirely focused on CEO Elon Musk’s grand vision for the future—his “army of robots,” autonomous vehicle technology, and his potentially massive compensation package. In contrast, the car manufacturing business, which the company currently relies on for survival, seemed to take a backseat.
While building robots is far more exciting than selling cars, the latter is the very foundation funding the former’s ambitious plans. However, a glaring red warning light has already lit up in the company’s third-quarter performance data, which could very well jeopardize the future Musk has painted.
Using profits from mature businesses to fund research and development in cutting-edge technologies is a proven path to success. Meta Platforms (META) relies on steady advertising revenue from Facebook and Instagram to support its ambitions in the “metaverse”; Microsoft (MSFT) has long used the substantial profits from Windows and Office software to continuously invest in artificial intelligence. Therefore, Tesla’s strategy of selling cars to develop the Optimus robot or autonomous taxis is logically sound. But all of this hinges on having sustained and sufficient profits available for use.
The key difference lies in the quality of profits. Unlike the high-margin advertising and software revenues of Meta and Microsoft, the profit margins from Tesla’s car sales business are shrinking sharply. In the third quarter, Tesla’s operating margin plummeted to 5.8% from 10.8% in the same period last year, a drop of five percentage points. In comparison, Microsoft and Meta recently reported operating margins as high as 44.9% and 43%, respectively. The profit calculation process clearly reveals where the pressure lies: Tesla’s record quarterly revenue of $28.1 billion, after deducting $23 billion in cost of sales, resulted in a gross profit of $5.1 billion. Finally, after covering various operating expenses, including $1.6 billion in R&D costs, only a meager operating profit of $1.6 billion remained.
The high revenue in the third quarter temporarily masked the issue of low profit margins, but there is good reason to believe that both margins and revenue could face downward pressure in the fourth quarter and beyond. With the expiration of the U.S. government’s $7,500 electric vehicle tax credit, Tesla’s overall sales are expected to be significantly impacted. Furthermore, the company has begun launching lower-priced versions of its main models, the Model 3 and Model Y (which accounted for 96.8% of Q3 sales), which is bound to further erode its already tight gross margins. Some analysts believe there is a risk that Tesla’s gross profit in the fourth quarter could halve or decline even more sharply.
Meanwhile, if Tesla is determined to increase investment in autonomous driving and robotics technology, the $1.6 billion R&D expense in the third quarter is likely just the beginning. Squeezed by pressure on the revenue side and expansion on the expenditure side, it is highly probable that Tesla will fall into a net loss next quarter. The company’s last quarterly loss dates back to the end of 2019, and coincidentally, it was after that period that Tesla’s market capitalization first surpassed $65 billion.
The core question is, if Tesla fails to be profitable again, can its current market capitalization of over a trillion dollars still be maintained? The answer might lie in the market’s confidence in its future story; the current high stock price is largely supported by investors bullish on its disruptive technology. However, the widening gap between the company’s fundamentals and market expectations is undoubtedly a potential risk that cannot be ignored.
This critical moment also comes with a historic opportunity. Some analysts point out that Tesla’s push in Austin, Texas, to launch autonomous taxi services without safety drivers could be a key juncture. This move requires no additional regulatory approval, and its vision-only autonomous driving solution is challenging industry conventions. If it can successfully solve the problem of fully autonomous driving, its technological breakthrough will have powerful spillover effects, radiating to broader fields of intelligent robotics such as aviation and maritime. This process is likened to Watt’s improvement of the steam engine—not creating something from nothing, but solving a core flaw through key innovation, thereby igniting the whole situation. Tesla is on a similar path, but its first priority might be to navigate through the imminent financial storm ahead.
