Tesla released a mixed bag of business performance for the third quarter of 2024 early this morning. However, due to investors' positive reaction to profit growth, rising gross margin, and the news of Tesla's cheaper electric cars expected to be put into production next year, Tesla's stock price surged in after-hours trading.

In the third quarter, Tesla's revenue was $25.18 billion, lower than analysts' expected $25.4 billion, higher than the $25.05 billion in the second quarter, and also exceeding the $23.4 billion in the same period last year. Adjusted earnings per share were $0.72, higher than analysts' expected $0.60. The closely watched gross margin stood at 19.8%, far surpassing the expected 16.8%.

Tesla's third-quarter profit exceeded Wall Street expectations, which was somewhat surprising. Prior to this, the company had failed to meet profit expectations for several consecutive quarters. As a result, Tesla's stock price surged by 12% in after-hours trading on Wednesday.

Mixed Business Performance in the Third Quarter

Let's delve into the details of Tesla's third-quarter performance report. Prior to this, Tesla had already announced its car delivery data for the third quarter. Nevertheless, analysts still overestimated Tesla's revenue-generating capabilities. Previously, Tesla had maintained a high single-digit growth rate, but this time analysts expected a year-on-year revenue growth of about 10% for Tesla, while the actual growth was 8%.

1) Sluggish Automobile Business

Tesla's revenue growth is very uneven, with revenue from its core auto business growing by only 2%. Considering that the current inflation rate is still over 2%, Tesla's largest business segment has not shown any actual growth so far, which is not a good sign.

This year, the growth rate of the global electric autos market is not strong. This is partly due to the softness of the electric autos market in Europe, but tesla autos business has not seen any actual revenue growth, which is still somewhat disappointing. After all, tesla's pricing is not at all like a 'common' autos company. For a company with a PE ratio of about 100 times, the largest business segment should be able to achieve significant growth in both nominal and actual value.

Compared to the same period last year, autos sales have increased by 6%, while autos revenue has only increased by 2%, which is also a problem. Despite the introduction of the high-priced Cybertruck pickup truck, the average selling price is clearly declining, which could raise profitability concerns for the autos business in the future. Demand also seems relatively weak, as despite price cuts, sales growth is relatively slow. In addition, the continuously growing inventory levels also point in the same direction.

2) Inventory Increase

Global inventory levels have risen to a 19-day supply, higher than the 16-day supply a year ago, an increase of about 20%. If demand were very strong, inventory levels should have decreased, especially considering tesla's continued price reductions. But if inventory levels continue to rise under price incentives, then demand is obviously not very strong. Of course, macro uncertainty may be a negative factor, but intensified competition from chinese electric autos companies may also be a factor. Finally, CEO Elon Musk's pro-republican stance may also alienate some potential customers.

3) Strong Energy Business

Fortunately, the strong performance of the energy business partially offsets the weakness of the autos business. In the third quarter, tesla's energy business revenue increased by 52% year-on-year, and the gross margin of the energy business also expanded to around 30%, an increase of 600 basis points compared to the previous quarter. The strong growth of the energy business is mainly due to the outstanding performance of its energy storage business. In the third quarter, tesla set a new record for Powerwall deployments, with total storage deployed rising to 6.9GWh, a 75% increase year-on-year.

However, the energy business may be quite unstable, so the performance of this business segment in the fourth quarter and beyond cannot be guaranteed to be equally strong. But at least in the third quarter, the energy business performed well in terms of business growth and finance, with attractive sales volume and high profit margins.

4) Profit Margin Improvement

Across the company, Tesla's profit margin has increased compared to a year ago, mainly due to strong performance in the energy business and higher carbon credit revenue. The profit margin from carbon credits is very high, so the growth of this indicator will have a significant impact on Tesla's profitability. In terms of carbon credit sales, the performance in the third quarter was the second best in history, which was one of the reasons why Tesla's third-quarter profit exceeded expectations.

In the third quarter, Tesla's operating profit margin rose to 10.8%, better than the past few quarters, although still not too high compared to other automakers. For example, BMW achieved a profit margin of 10.8% last year, while Toyota Motor achieved a profit margin of 12% during the same period. Therefore, Tesla appears stable but far from spectacular based on the current profit margin.

Tesla's earnings per share increased by 9% year-on-year, rising from $0.66 to $0.72, falling between revenue growth and profit margin growth. At the current level, Tesla's annual earnings per share should be slightly below $2.50. Bullish investors seem to believe that this ensures a stock price well above $200, although others may disagree.

5) Insufficient Free Cash Flow

Recently, Tesla's cash flow generation has been a concern, with negative free cash flow in the first half of this year. However, in the third quarter, this situation changed: with the help of operating asset and liability changes, operating cash flow increased by $1.6 billion to over $60 billion.

Free cash flow is around $3 billion, showing a significant improvement compared to the first half of the year. Nevertheless, Tesla has only generated $1.5 billion in cumulative free cash flow so far this year, equivalent to an annual rate of around $2 billion. For a company valued at around $700 billion, this is not much, as it means the free cash flow yield is only about 0.3%.

Certainly, Tesla's liquidity is not a concern as its balance sheet is quite strong, with a cash position of $34 billion. Therefore, Tesla has ample reserves to invest in its self-driving ride-sharing and energy business.

Elon Musk's commitment

1) Growth in delivery volume

Tesla CEO Elon Musk stated on the earnings conference call that he expects a "slight increase" in car delivery volume this year, with a possible increase of 20% to 30% next year. In the third quarter, Tesla delivered 0.463 million cars, a 6.4% year-on-year increase, marking the first quarter-on-quarter growth in sales this year and also setting a delivery record for the third quarter in history.

2) Self-driving taxi

Ahead of the third-quarter earnings release, investors and analysts were waiting for more news about the Cybercab self-driving taxi and the Model 2 affordable electric vehicle. Musk stated in today's conference call that Cybercab is expected to achieve mass production in 2026, with a target of producing 2 million Cybercabs annually.

Currently, Tesla is testing its self-driving taxi service for employees in the San Francisco area. Musk said, "Through the app, you can request a ride that will take you anywhere in the Bay Area." Musk also noted that these test drivers are accompanied by safety drivers.

So far, the public knows very little about Tesla's service. Today, Musk and other executives shared a timetable with investors, including plans to start paid rides in California and Texas sometime next year. Musk said on the conference call, "We believe that at some point next year, we will be able to have self-driving Teslas available for paid rides."

Morningstar analyst Seth Goldstein believes that next year Tesla may deploy a 'small-scale' paid autonomous driving taxi service, but the scale should not be very large.

Goldstein said: 'Musk has previously provided optimistic timelines, but these timelines have been delayed several years multiple times before we see tangible products. Of course, for Tesla, nothing is impossible.'

3) Low-cost models

Musk also added that Tesla is still expected to produce new cars in the first half of next year, including potentially a cheaper Model 2 electric car. Musk stated that with incentives, the price of electric vehicles will be below 0.03 million dollars, which is a key threshold.

4) FSD

Musk also discussed the progress of the Full Self-Driving (FSD) feature. He said that Tesla internally expects by the second quarter of next year, FSD will be safer than human drivers. He said: 'There is no need to wait for Robotaxi to fully achieve autonomous driving. We expect to achieve this goal next year with existing models.'

5) Humanoid Robots

Musk mentioned that Tesla's humanoid robot, Optimus, is making progress. He said Tesla has the most advanced humanoid robot, far ahead of other similar products because Tesla combines AI and manufacturing capabilities that competitors do not have. Musk also said: 'Optimus is likely to become the most valuable product ever.'

Is Tesla still a good investment?

Tesla's performance in the third quarter was better than expected, showing several positive factors: profits improved, profit margins recovered to some extent, and cash flow performance was much better than the poor numbers in the first half of the year.

However, Tesla still faces issues: despite the growth from the high-priced Cybertruck, the average selling price continues to decline, Tesla's automotive business is underperforming, with no actual (inflation-adjusted) income growth, and inventory levels are rising.

Tesla has potential in the future autonomous taxi market, but unlike competitors like Waymo, it has no products on the road yet. It's hard to say if Tesla can catch up with the current market leaders.

Tesla's annualized free cash flow yield is currently only 0.3%. Tesla's P/E ratio is about 100 times, much higher than competitors, so Tesla's stock might be too expensive, with high risks. Even if Tesla's stock price drops by 20% or 30%, it still would not be cheap.

Tesla's current automotive business growth is relatively weak, so during economic recessions or downturns, it could suffer significant losses. Industry analyst Jonathan Weber believes that overall, he still puts a put on Tesla, mainly due to its high valuation and the intense competition in the electric vehicle and autonomous taxi markets.

On Wednesday, Tesla's stock price closed at $213.65 per share, down 1.98%. After the financial report was released, Tesla surged 12% in after-hours trading, reaching $239.50 per share. So far this year, Tesla's stock price has cumulatively decreased by 14.02%.