BONUS: Tesla's Latest Update - Record Revenue, Shrinking Profits

Welcome back to the podcast. Welcome to a special bonus edition, and welcome to a show that we'll call Tesla's latest updates, record revenue, shrinking profits.

This is not a financial podcast. I'm interested in larger, more broader trends in the EV industry than quarterly bets on the stock market and the infighting that always goes along with it on the financial channels and on social media.

So that's never my focus. I'm interested in thinking more about the big picture.

So as a bellwether of the EV industry in many people's minds and also for many of the media at the poster child, I wanted to see what Tesla said on the most recent company update.

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Let's get into it. Tesla just reported the most contradictory quarter that I can remember.

On one hand, record revenue of $28.1 billion, record deliveries of 497,000 vehicles and a staggering $4 billion in free cash flow.

Nice business, if you can get it. The highest in company history, the company sitting on a war chest of $41.6 billion in cash investments.

They're not going bust anytime soon. For those of us that have been covering the EV industry for a long time, what are my seven, eight years in now?

Yeah, these are good times for Tesla. On the other hand, profits are collapsing there.

Net income is down 37% year over year to $1.4 billion. Operating income dropped 40%.

Margin's are declining for the fourth straight quarter in a row.

Earnings per share are down as well. And in the immediate aftermath, the stock price was down and it'll probably bounce up and it'll go down again.

I'll leave that to the people who worry about these things. But let's zoom out a little bit.

Mr Musk spent the entire earnings call talking about none of their car business.

He doubled down on Tesla's transformation from no longer being a car company to an AI and robotics company.

Making predictions about robot taxis, intense cities, unveiling plans for Optimus 3, the robot that will be the biggest product of all time, his quote.

And yes, defending his need to have control over his future robot army.

For any longtime fan of Tesla like myself, for those that realize they really invented the current EV industry as it is now,

perhaps have had maybe their confidence shaken like I have with a CEO who is now overtly political, a more divisive move into politics,

adopting a less tolerant persona. He used to tweet out, you know, inclusive messages and optimism about the future of the planet and clean transport.

And in the last few years, he's been a far less tolerant caricature, a persona on social media.

I really can't get behind that. I don't want to be associated with some of the mean things he says online.

So Tesla is itself in an identity crossroads.

Is Tesla a car company anymore? Or is it an AI robotics company that happens to make cars?

Let's take a look at the numbers.

Tesla's top line performance was really, really impressive.

Revenue, an all time high, twenty eight point one billion dollars, up twelve percent year over year, crushing the estimate of twenty six point four.

This was driven by record vehicle deliveries of four hundred and ninety seven thousand units, exceeding their own estimates and Wall Street too.

American buyers have been rushing to capture the federal tax credit before the expiration at the end of September.

It's an artificially inflated Q three number pulling demand forward from Q through and Q four and twenty twenty six as well.

Will we see a hangover from this in coming quarters?

I made a whole bonus podcast yesterday about this. Check it out.

It's in your feet. The energy storage business is delivering record deployments of twelve point five gigawatt hours.

I'm so excited about batteries on the grid and EVs all working together for the energy future that my children are going to inherit.

And it's fascinating that we can move away from needing to boil our kettle and the grid having to go right.

Let's burn some coal or natural gas or whatever to being like, OK, well, we've got some some renewable stored in various ways.

But batteries being one of them.

I love this future or maybe I'll use some energy from your own car.

Enjoy your nice hot cup of tea.

Now revenue climbing in the energy storage business 40 percent year over year to three point four billion dollars operating margins over 30 percent.

Nice business over the past year.

Energy generated 20 percent of their total profit, by the way.

So it's a big bit of the business now and then there's cash flow.

Tesla generated four billion dollars in free cash flow operating cash flow is six point two billion.

This is critical because it proves that despite all the margin pressure and heavy AI investments,

Tesla's core business is making money from cars.

That forty one point six billion dollars in cash and investments gives a huge amount of runway for whatever bets they want to place.

Now for the painful bit, net income fell to one point four billion dollars.

I still wouldn't mind that.

Pretty good business if you ask me, but it's down thirty seven percent from two point two billion last quarter.

The third consecutive quarter of declining profits.

Fourth consecutive quarter of declining margins, automotive margins, excluding the regulatory credits.

And if you're new to all this or you're kind of learning about EVs, Tesla get paid by the other car companies in various parts of the world, by the way,

because they generate clean credits called different things around the world.

But effectively, it's cheaper to buy another car company, your competition.

Effectively, if you're a car company that's going to miss these emissions limits, pay Tesla some money rather than governments, regulators,

wherever you are, California, EU, it's cheaper to do that.

And Tesla make a lot of money from their competition.

And so those regulatory credits, gross margin, excluding those was fifteen percent, fifteen point four percent.

That's eighteen percent a year ago, twenty five percent three or four years ago.

Traditional car makers like Ford and GM are about five to eight percent.

So Tesla, even at fifteen percent, is probably more than double their competition in terms of gross margins without credits.

Tesla's entire advantage has been its ability to maintain these huge margins whilst their competition struggled.

Falling to fifteen percent is not the end of the world, but they are losing what was once a strength.

Tariffs cost them four hundred million last quarter, three hundred million the quarter before.

So, you know, let's split roughly between cars and energy and it's not a huge amount of money.

Regulatory credit revenue was once their secret weapon.

In fact, for many people who don't like Tesla for various reasons, many of the haters all have their own weird reasons sometimes.

But regulatory credits was often a stick which people hit Tesla with.

Say, well, you're not profitable if you haven't got government money or other money from other car companies.

I mean, I sort of get the argument, but that was once their secret weapon to getting to profit.

That declined to just four hundred and seventeen million dollars.

It was three quarters of a billion dollars a year ago.

Changes in US policy are going to affect Tesla, meaning Tesla doesn't get any of this money because the emissions rules in the US are going to change under this administration.

So, Tesla is going to lose up to two billion dollars annually and they need to find that either in new revenue or cut costs or eat into their war chest.

Operating expenses up fifty percent year over year.

Tesla is making big bets in AI and robotics.

They also had some restructuring, some legal costs and some performance based awards equity to their employees.

OK, let's try and read between the lines a little bit then.

Tesla's Q3 shareholder letter was notably brief, but it didn't say what is more revealing than it.

What it didn't say rather is more revealing than what it did.

The company provided almost no guidance for Q4 or even for next year.

Perhaps most glaring, no mention of the Cybertruck.

And what I find fascinating as an EV podcast and for a vehicle which was launched and was going to be their biggest product.

We're going to make hundreds of thousands of these or more a year.

Cybertruck is invisible at Tesla now.

And that's a huge thing that, by the way, no one mentions because they're either fascinated by robots or AI or the latest thing that the CEO is saying on social media.

But no one ever stops and goes, all right, well, let's just take a check of the things you've said in the past and whether you've delivered on those promises.

And OK, there is what is effectively these days, the joke of full self driving that they've been promising it for years and haven't.

The Roadster, the people have just given their money to Tesla and are never going to get the car.

Apparently it's coming this year, we'll see.

And so no one talks about Cybertruck.

Like they have built huge facilities to make Cybertruck and they're not using them,

which is why they've had to take the lines they're making the three in the Y on and make standard versions of those to try and sell some more vehicles.

Tesla's been delivering Cybertrucks for nearly two years now, and yet it was Cybertruck entirely absent.

And a couple of years ago, this was going to be their biggest product.

It refuses to disclose whether Cybertruck is profitable and Q3 Cybertruck sales were down 62 percent year over year.

Q3 for the quarter, by the way, less than five and a half thousand Cybertruck sold.

Everybody who wants one has now got one and they're just a kind of curiosity piece.

That is a catastrophic decline for what the CEO, Mr Musk once claimed, would be Tesla's highest volume vehicle.

And yet it's not and it's all trying to be quietly forgotten about.

I'm literally the only person going, can we just talk about Cybertruck, please?

You can't just say stuff, build facilities, make enormous bets and capital investment to build the facility to make Cybertruck.

And they're lying idle and no one talks about it.

No one cares.

Well, maybe it's just me.

Many things up.

This silence suggests Cybertruck is harmful to the business combined with the new cheaper Model 3, Model Y variants launching in November.

The first one's being delivered in the US right now, by the way, the Model Y.

Tesla is sacrificing margin just to get volume.

They don't want to just sell some units.

AI and robotics are taking center stage.

What the letter did emphasize was full self-driving across the United States.

They're seeking regulatory approval in China and the Middle East and the robotics initiatives as well.

The message was clear.

Management's focus is anything but the car business.

The shareholder letter painted a picture of a company that knows where it's going.

Clearly, it's AI and robotics, which might sadly mean Tesla plays less part on EV news daily.

I hope not, but it didn't spell out how it's going to get there.

Okay, let's talk about what was clear was that Tesla is going to be much less of a force in the EV industry than it has been.

If the shareholder letter was cautious and brief, which it was, the earnings call was quite the opposite.

The CEO, Mr Musk, delivered on making those inflammatory statements and things that generate headlines

and is the big shiny thing to look over here, look at what he said on the call, report that.

Don't report what's really the issue.

Elon Musk opened with a manifesto about Tesla being an AI and robotics company

spending minimal time on the automotive business.

That's the bit of the business that generated $24 billion of the $28 billion.

We are at a critical inflection point for Tesla.

The CEO said immediately pivoting to what he calls now physical AI.

So autonomous driving, robot axes, optimist robots.

Musk announced Tesla is launching a ride hailing service in the Bay Area

and expected robot axes to operate without safety drivers in many parts of Austin by the end of the year.

He claimed expansion to eight to 10 metro locations also by the end of the year.

Nevada, Florida, and Arizona compare this to Waymo, which operates fully driverless robot axes

with no safety drivers in Phoenix, San Francisco, LA, Austin, Atlanta,

coming to London next year, providing 250,000 paid rides per week.

It's a business that's a million miles monthly.

Waymo operates level four.

True autonomy.

Tesla, despite years of promises, still has safety monitors in the car.

Buried in some of the remarks made by the CFO,

who's normally a little more considered, Viperav Taneja,

said that 12 percent of Tesla's fleet now pays, subscribes to FSD.

But he was deliberately vague because he didn't say,

is that 12 percent of the fleet of cars that are on the road

or 12 percent of the fleet of cars that can actually subscribe to FSD?

Because we can't, for instance.

That is a huge piece of a mission from someone who should be very specific

with their language and on purpose wasn't being.

This fundamentally undermines the robot taxi timeline.

Let's be really generous and say 12 percent of all Tesla vehicles on the road,

the fleet, the car park have gone for FSD, which I don't think it has.

You know, there's not hundreds of thousands of people paying for it for full FSD.

Even then, 12 percent of people, and you can try it, it means it's not ready.

Why would regulators approve it when it's blatantly not ready?

Because the people who drive the cars every day might say,

yeah, this is brilliant, but I'm not going to pay for it yet.

And it is brilliant when it works.

It's awesome. Musk spent considerable time hyping robots,

making grandiose claims.

Optimus will be an incredible surgeon, he predicted,

adding that with Optimus and self-driving technology,

you can actually create a world where there's no poverty,

where everyone has access to the finest medical care.

He revealed plans to unveil Optimus V3 in February or March next year,

describing it as looking almost like a human wearing a robot suit.

He predicted production intent prototypes

followed by manufacturing lines making a million units by the end of 2026

and totally ignore the fact that he previously said there'd be

a million units by the end of 2025 and nobody ever stops to question him.

It'll seem so real that you'll need to poke it.

He said, calling Optimus the biggest product of all time.

Now, if that is not a showman flexing his full muscles,

I don't know what is the biggest product of all time.

Well, the most eyebrow-raising moment wasn't even that

because he wants to get paid a trillion dollars pay package.

And he said, if we really want to build a robot army,

do I have at least a strong influence over the robot army?

I just don't feel comfortable building a robot army here

and then being ousted because of some asinine recommendations

from ISS and Glass Lewis who have no frigging clue.

I mean, these guys are corporate terrorists.

So these are, this outburst came after institutional

shareholder services and Glass Lewis, the large proxy advisory firms.

Recommended that the shareholders vote against his pay package.

Despite that, I'm sure it will get put through in November when they vote on it.

And they said that the package should be valued at 141 billion

and warned that even hitting one of the 12 performance milestones

would deliver billions in compensation to Musk

and cut shareholders ownership by about 11.3%.

So they're arguing about whether he should get paid that

and you can decide whether anyone's worth a trillion dollars.

To have a million dollars is nice, but I'm told these days

that a million dollars isn't much money.

So to have a hundred million, to be able to write somebody a check

for a hundred million and know that that check would clear,

you would be fabulously wealthy.

To have a billion, to have a thousand million,

that would be your lifetimes work would then be

how do I give this away so that I can make other people's lives better?

To be a billionaire would be just an insane thing to try and get rid of it all.

If you want to, I suppose.

But to be asked to be paid a trillion, a thousand billion,

a trillion dollars to come to work and do a job.

Well, many people think that it shouldn't happen

and he unloaded on them.

Boy, did he, the package, his pay package is structured around

selling a million AI robots, a target that has nothing to do with cars.

And I, you know, is disappointing for me as an EV podcast

because I'd like Tesla to talk about cars.

Now, what I didn't address, conspicuously absent.

They didn't talk about the tax credit going, which, you know,

a previous version of Tesla a few years ago would have talked a lot

about how their business is going to be impacted by

the tax credit going, totally ignored.

Whether Cybertruck is profitable, whether they'll carry on making Cybertruck

or close it down as has been talked about now that they can't sell any of them

because what's the point?

And so totally ignored, specific tariff strategies beyond any kind of vague reference.

Guidance on Q4, no, nothing about that.

Whether the new cheaper Model Y and Model 3 will, what they'll do for the business,

totally ignored.

I mean, it's such a disappointment really because it's so much good stuff

we could be talking about with Tesla all ignored for robots and AI.

The CFO did provide more grounded commentary,

noting that automotive margins, excluding credits, improved marginally

and improvements in material cost and fixed cost absorption.

I mean, these are all sort of financial things,

but kind of interesting to listen to someone who likes to learn about EV.

So I'll take a quick break.

We'll talk about the reaction next and what it could all mean

and the identity crisis that Tesla is about to go through.

Stick around back in a moment.

OK, let's talk about the reaction to Tesla's latest update.

The immediate reaction was pretty swift and negative shares falling after hours.

But Gary Black manages Future Fund.

One of Tesla's most followed investors was Blunt on X.

He wrote, Tesla's update was long on promise, but short on specifics.

The technical jargon and buzzwords do little to install confidence.

Hence the stock price keeps falling.

Mr. Black arguing that management should have focused on strategy,

initiatives, early consumer response to these the new affordable vehicles,

not robots being surgeons.

Ross Gerber, who is a co-founder of Gerber Kurosaki,

big investor often turns up on the TV channels, arguing that Tesla moving away

from the EV business, which he believes is still wildly profitable,

twice as much as their competitors, is a big error for the company.

Tesla makes the best cars in the world, he said on TV,

noting that he personally owns Tesla stock and holds over $80 million worth

for his clients.

But his frustration is towards this pivot towards robots and AI.

On full self driving, he pulled my punches.

I just don't think it works and I think vision only systems won't work.

And I'm very sure of this now.

I don't think Elon gets how humans work.

OK, perhaps the most incisive analysis came from Fortune and Sean Tully,

who tried to put a number on what he called the Musk magic premium.

I like that the portion of Tesla's valuation that rests on the faithful,

believing everything that the CEO says.

His analysis was pretty devastating after removing the regulatory credits,

which will go in at least in the US.

I think more money will come in from over here.

But still and also the other adjustments around Bitcoin and things.

He said that Tesla's core repeatable earnings over the last four quarters

would be three point three billion dollars, which values if you value Tesla

as a car company, which is how they make all their money,

they should be worth seventy five billion, not one point four five trillion.

So that's exactly why Tesla will tell you they're no longer a car company

because if they are known as a car company,

they can't be justified as existing how they are currently.

And so that's how they make their money, though.

It is a car company.

I still love Tesla cars and talking about that.

I got no interest in AI and robotics, but it's an identity crisis.

Tesla's a car company, but the trends are concerning.

Automotive margins are declining, approaching single digit margins,

which would put them in line with all of their competition.

The loss of the tax credit is surely going to have a big impact,

but they refuse to talk about it.

And if Tesla is an AI and robot company,

then the timeline to actually show us some proof is approaching.

And if it's 12 percent of all Tesla customers and I think that is not.

But if it was 12 percent of all Tesla customers have now paid for FSD,

that still shows that the system is not ready for prime time.

Otherwise, more people would on robots.

He promised V three next year, whatever that means,

a million of them by the end of next year, but he promised that this year as well.

So I think it's safe to ignore.

Financials at Tesla are incredibly strong, though.

Forty one point six billion dollars in cash and investments.

So what a war chest to have and four billion in quarterly free cash flow.

They can afford to take big bets.

I just wish it was big bets on automotive and energy storage and things like that.

Well, it gave us a really interesting, profound contradiction.

This update revenue was at a record historic cash flow.

Vehicles are being delivered and these are great, great cars.

Not quite so sure that the standard ones are great cars.

Things are lost is stripped out of those, which they perhaps

will suffer from because Tesla wants to be those of premium brand.

And that's certainly not premium vehicles, but the underlying engineering is still

all good Tesla stuff, right?

The next few months are going to be interesting.

Q4 sales will reveal whether the demand collapses without federal tax credits

or whether they can pull enough levers, finance, leasing interest rates

to keep those levels high.

Will they maintain volume without destroying what's left of their margin

advantage or will they become just another car company?

Robo taxi expansion will show whether Mr.

Musk's autonomous driving promises are ever going to be reality

or remain perpetually just around the corner and how many people will carry on believing him.

Thanks for listening and I'll see you on the next one.

BONUS: Tesla's Latest Update - Record Revenue, Shrinking Profits

About this episode

electric vehicle (EV)

automotive margins

regulatory credits

gross margin

Ford

GM

emissions rules

Tesla Cybertruck

Tesla Roadster

Tesla Model 3

Tesla Model Y

full self-driving

EV industry

autonomous driving

Waymo

level four

FSD

federal tax credits

leasing interest rates

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