Tesla shares rally 10% as margins outpace expectations

Tesla's Q3 2024 earnings report showed a strong performance, beating expectations on several key metrics. Adjusted EPS came in at $0.72, significantly above the consensus estimate of $0.60, while revenue reached $25.18 billion, slightly missing the expected $25.43 billion. The company also reported a gross margin of 19.8%, beating the estimate of 16.8%, highlighting its continued operational efficiency despite challenges in pricing and competition.

Automotive gross margins, a key focus for investors, benefitted from deferred Full Self-Driving (FSD) revenue recognition and stronger-than-expected regulatory credits. Excluding these items, auto gross margins were at 15.6%, still higher than the consensus of 14.9%. However, Tesla warned that margins are likely to decline sequentially in Q4 due to ongoing competitive pressures and production costs. Operating income came in at $2.72 billion, surpassing the $1.96 billion estimate, and free cash flow also outperformed, reaching $2.74 billion compared to the $1.61 billion expected.

On the call, CEO Elon Musk provided updates on several key initiatives, including Tesla’s focus on FSD and the rollout of its robotaxi program. Musk highlighted that the company plans to begin offering paid rides in Texas and California as early as 2025, pending regulatory approval. This development could pose a challenge to ride-hailing companies like Uber and Lyft, creating a potential new competitive landscape in the transportation sector.

Energy storage was another bright spot in Tesla's report, with revenue in this segment surpassing expectations. Musk noted that energy storage deployments more than doubled year-over-year, reinforcing Tesla's growing presence in the renewable energy sector. Additionally, Tesla reported a positive gross margin for Cybertruck production, signaling progress in its efforts to scale this high-profile vehicle.

Tesla's stock reacted positively to the report, climbing over 11% in pre-market trading following the earnings release. Investors were particularly encouraged by the company's strong margin performance and free cash flow, along with Musk's optimistic outlook for vehicle growth in 2025. Tesla expects to see 20-30% vehicle growth next year, a significant improvement from the nearly 6% decline in global deliveries in the first three quarters of 2024.

Looking ahead, Tesla continues to prioritize advancements in Full Self-Driving technology. Musk stated that the upcoming Version 13 of FSD is expected to deliver a 5-6X improvement in miles between driver interventions, a key metric for autonomous driving safety. Tesla also reiterated its plans to launch more affordable vehicle models by the first half of 2025, which could further expand its customer base.

Overall, Tesla’s Q3 results showcased resilience despite macroeconomic challenges and heightened competition. With ongoing advancements in FSD, a growing energy business, and the continued ramp-up of Cybertruck production, the company remains well-positioned for future growth. However, investors should remain mindful of potential margin compression in the near term as the company navigates production costs and pricing strategies.