TSLA • 10-Q • Q2 2024 • Positive

Tesla's Margins Hit Multi-Year Low as Price Cuts and Cybertruck Investments Strain Profitability

July 24, 2024 • 1 min read

TL;DR

Tesla reported significant margin compression in Q2 2024, with automotive gross margins falling to 18.1% from 28.6% YoY, marking the lowest level in four years. Revenue grew 9% YoY to $24.9B, driven by a 20% increase in vehicle deliveries, but aggressive price cuts and Cybertruck ramp costs weighed heavily on profitability. Operating income declined 3% YoY to $2.4B as the company invested heavily in manufacturing expansion and next-generation vehicle development. Management expects margins to re

Financial Performance Overview: Q2 revenue reached $24.9B (+9% YoY, -1% QoQ) with automotive revenue of $21.3B (+8% YoY). Operating margin contracted 370bps YoY to 9.6% due to price reductions and higher costs. Free cash flow declined 44% YoY to $1.0B as capital expenditures increased 29% to $2.1B. Services and other revenue showed strong growth at $2.5B (+47% YoY) but remains a small portion of total revenue. Energy generation and storage revenue grew 74% YoY to $1.5B.
Strategic Initiatives and Operational Changes: Tesla is accelerating its next-generation vehicle platform development while ramping Cybertruck production in Texas. The company has increased capital expenditure guidance to $8-9B for 2024, primarily for Cybertruck tooling and new manufacturing capacity. Management highlighted progress on FSD development with over 300M miles driven. The Mexico Gigafactory plans remain on track with production expected to begin in late 2025.
Market Position and Competitive Dynamics: Global EV market share declined slightly to 16% from 17% YoY as Chinese competitors gained ground. Tesla maintained leading position in US/EU but faced increased pressure from BYD in China. Average selling price (ASP) decreased 15% YoY as the company prioritized volume growth and market share defense. Customer retention rates remained strong at 82% despite pricing pressure, indicating brand resilience.
Operational Efficiency and Profitability: Factory utilization improved to 85% (+500bps YoY) as production processes matured. Manufacturing cost per vehicle decreased 2% QoQ but remained 5% higher YoY due to Cybertruck investments. R&D expenses increased 38% YoY to $1.1B as next-gen platform development accelerated. Supply chain improvements and manufacturing efficiencies partially offset pricing headwinds, but overall profitability metrics declined significantly YoY.
Growth Catalysts and Material Risks: Near-term growth depends heavily on Cybertruck launch success and continued demand for Model Y/3. Energy business showing promise with 74% growth and improving margins. Key risks include intensifying EV competition, potential demand softness in China, and execution challenges with next-gen platform development. Management expects production growth of 50% annually but acknowledges near-term margin pressure.

Revenue

$24.9B ( YoY, QoQ) with automotive at $21.3B ( YoY)

↑ +9%

Rd Spend

$1.1B ( YoY) representing of revenue

↑ +38%

Net Income

$2.7B ( YoY) with net margin

↓ -24%

Gross Margin

(-1050bps YoY) driven by pricing and mix

↑ 18.2%

Free Cash Flow

$1.0B ( YoY) with conversion rate

↓ -44%

Operating Margin

(-370bps YoY) reflecting investment cycle

↑ 9.6%

Growth Indicators

3.2M active customers ( YoY)

↑ +35%

Retention Rate ↑82% (-200bps YoY)

Vehicle Deliveries ↑466,140 units (+20% YoY)

Key Risks

Chinese competition expansion threatening market share in key growth regions
Cybertruck production ramp execution risks with novel manufacturing processes
Raw material cost volatility impacting margins despite recent moderation
Regulatory scrutiny of FSD technology increasing globally

Key Opportunities

Energy storage market expansion with 100GWh+ deployment potential in 2024
Services revenue scaling with growing vehicle fleet (+47% YoY growth)
Next-generation platform targeting 50% cost reduction at scale
Geographic expansion into India and Mexico markets

Bottom Line

Tesla's Q2 results reflect a company managing through a critical transition period. While near-term margins face pressure from competitive dynamics and investment cycles, the foundation for future growth appears solid. Energy and services businesses show particular promise as diversification vectors. Key metrics to watch include Cybertruck production ramp progress, next-gen platform development milestones, and demand elasticity in response to pricing actions. The next 2-3 quarters will likely remain challenging as investments weigh on margins, but long-term competitive positioning continues to strengthen. The contrarian insight: Tesla's margin compression may actually indicate rational strategic choices rather than competitive weakness, as the company positions itself for the next phase of EV market evolution.