What Drove Tesla’s Q3 Earnings Beat?

Tesla stock (NASDAQ:TSLA) posted a better-than-expected set of Q3 2024 earnings. Revenue for the quarter rose 8% year-over-year to $25.18 billion a year earlier, while net income was up almost 17% to $2.17 billion. The earnings beat and commentary from CEO Elon Musk indicating that volume growth for next year could be much stronger sent the stock up by close to 12% in after-hours trading. Notably, much of the upside came from regulatory credit sales and Tesla’s often-overlooked energy business.

A couple of factors have driven Tesla’s earnings bump. Deliveries for the quarter rose by about 6.4% compared to last year to 462,890 vehicles, marking the company’s first quarter of growth in 2024. Average selling prices continued to trend lower, coming in at under $40,700 for Q3, down almost $1,000 compared to the previous quarter as price cuts, weaker product mix for the mainstream S, X, Y and 3 models, as well as highly discounted financing options. Now a bulk of Tesla’s earnings lift came from the sales of about $739 million in automotive regulatory credits. As an EV manufacturer, Tesla earns regulatory credits that it can sell to traditional automotive manufacturers who are unable to meet government-mandated zero-emission vehicle sales targets. These credit sales, which we estimate are almost pure profit, are likely to have been a key driver of margins for the quarter. Gross margins for automotive sales stood at 16.4%, up from 15.7% in the year-ago quarter likely driven by lower costs, better scale and higher revenue recognition relating to fully self-driving software. Read more about Tesla’s recent troubles in China.

Tesla’s Energy business, which includes energy storage products and solar energy systems, was a bright spot. In Q3, revenue rose 52% to $2.38 billion, driven by strong Powerwall deployments and progress in scaling the latest Powerwall 3 and the Lathrop Megafactory. Storage deployments grew 75% year-over-year, and profitability too improved, with gross margin hitting a record 30.5%, up from 24% a year ago. The Shanghai Megafactory is on track to start shipping Megapacks in Q1 2025, which could further boost sales. Demand for energy storage solutions is expected to grow alongside increased installations of renewable energy sources such as wind and solar.

Overall, the performance of TSLA stock with respect to the index over the last 4-year period has been quite volatile. Returns for the stock were 50% in 2021, -65% in 2022, and 102% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could TSLA face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?