Hi YXI friends,

TSLA just reported its Q3 earnings, and investors seem to like it a lot. At the time of writing (12:30 ET), TSLA’s stock price is up 19% on the day.

How well did Tesla actually perform in the third quarter? Is it still a good time to buy? What are the major risks of holding the stock?

I will go through Tesla’s fundamentals and price analysis in great detail in this article. Let’s dive in!

DISCLAIMER: This newsletter is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

1. Tesla is still a car company

In Q3 2024, 80% of Tesla’s revenue came from automative, across sales, leasing, and credit.

Energy generation & storage and Services split the remaining revenue share roughly equally.

Tesla’s Q3 YoY Changes

In Q3, Model 3/Y production rose by 6% YoY and deliveries by 5%. The production of other models nearly doubled. Total deliveries across all models were up 6% YoY.

Energy Storage deployed rose by 73% YoY.

Tesla has also built 16% more Tesla locations to address the servicing wait time and 20% more supercharging stations in the past year.

Car Production and Deliveries

2. Elon takes a victory lap

Quarterly Revenue

Tesla’s quarterly revenue rose by 7.8%, which is a welcoming acceleration from Q2. It is still nowhere near its roaring pace of 2022, but at least moving out of the mud of negative growth from Q1.

Business Segment Performance

Automotive sales rose by just 1% in Q3. While regulatory credits went up by 33%, it’s a tiny piece of the pie.

The big jump was in Energy Generation & Storage, as the segment was up 52% YoY. For 2024 as a whole, this business segment roughly doubles.

TTM Revenue

The TTM Revenue is still basically flat, due to a miserable Q1 that saw negative growth. This means any Revenue multiple applied to TSLA right now will look expensive. The key rests on if TSLA can continue accelerating revenue in the upcoming quarters.

3. Profit margins are the stars of the show

Profit Margins

While TSLA missed the revenue estimate, it beat the earnings expectation handsomely. Profit margins across gross, operating, EBITDA and free cash flows all increased substantially.

CapEx

TSLA’s CapEX increased in Q3 both in absolute numbers but also as a percentage of revenue, reflecting heavy investments in AI.

The total CapEX for 2024 should exceed $11 billion, which puts the Q4 spend on $2.4 billion - slightly higher than Q4 2023 but nothing unusual.

4. Detailed financial performance

Note the cost discipline in declining SG&A and R&D expenses, contributing to a better operating margin.

While CapEx and tax went up, there was a positive cash flow impact from working capital change, resulting in substantially higher free cash flows for the quarter. Free cash flows were up by 650% from a year ago.

(Note that Free Cash Flow (GAAP) includes stock-based compensation (SBC, 1.8% of the revenue) and tax in its calculation. This would differ from Tesla’s own calculation using simply Operating Cash Flow less CapEx. It also differs from Cestrian’s method of excluding SBC and tax, which focuses on pre-tax FCF.)

5. Musk’s Future Narrative (aka “Outlook”)

2025 Vehicle Sales

Elon Musk’s best guess is a 20-30% growth in vehicle sales in 2025.

A New Car Model

Tesla plans to roll out a more affordable model in H1 2025, costing sub-$30k.

The new models will be manufactured in the same factories, which would reduce the CapEx required and increase production volumes.

Autonomous Driving

The great majority of Tesla cars are actually capable of autonomous driving, not just the robotaxi and robovan. But there is a lack of public awareness of this fact, and Musks thinks this is because the Tesla cars look just like a normal car.

This means Tesla is making 35,000 autonomous vehicles a week. In contrast, Waymo's entire fleet is less than 1,000 cars (according to Musk).

Musks expects Tesla’s FSD system to be safer than human drivers by Q2 2025. Tesla plans to roll out ride-hailing in California and Texas next year to the public. However, California is heavily dependent on the regulatory approval process that could take a while.

The Cybercab (robotaxi with no steering wheel) is expected to reach volume production by 2026 with an ambitious production target of 2 million units per year.

Tesla also expects to make substantially more higher-margin revenue from FSD subscription and software licensing in the future.

Energy Storage

Energy storage is expected to more than double in 2024, driven by strong demand for Megapacks and Powerwalls. Currently, Energy storage accounts for 9% of TSLA’s revenue, but it likely increases its share significantly in the coming years.

6. The macro take

A high interest rate environment is a major headwind for car companies. As the borrowing rates go up, which push up the monthly payments, consumers are less inclined to fork out for a new vehicle. We can see this in the steady decline of US vehicle sales and falling prices in the past year.

Moreover, vehicle insurance surged sharply in the past two years due to too many new cars on the road and supply chain bottlenecks from the Covid-era. We track these factors closely in our monthly CPI monitoring.

As the Fed starts cutting rates, it should help reduce the monthly financing payments for vehicle owners, thereby spurring demand.

TSLA vs US 2Y Treasury Yield (https://www.tradingview.com/x/vFdunxiW/)

This chart illustrates an inverse relationship between TSLA’s stock price movements and the 2-year Treasury Yield, which accounts for the Fed cut expectations in the forward 24 months.

Tesla benefited immensely from lower interest rates and COVID restrictions in 2020-2021. However, it peaked nearly exactly as the forward rate-hiking expectations rose through the 2-year yield. This year, TSLA’s stock moved almost in a mirror image as the 2-year yield.

As the 2-year yield continues to come down with the Fed’s cutting cycle, TSLA’s stock has a lot more room to run higher.

7. Election risks

It cannot be more clear that the Biden-Harris administration and Musk have issues with one another.

Biden didn’t invite Tesla to his electric vehicle summit in 2021, but favoured GM, Ford, and Stellantis. Unlikely Tesla, these three are the largest employers of the United Auto Workers.

In the current Election Campaign, Musk openly supports Trump, appearing on stage together and criticising Harris nonstop on X.

While it can be a bit mind-bending why Musk would support a candidate with poorer sustainability policy record, I think there could be a business motive there.

First, if Trump pushes back against EVs, it could hurt Musk’s unprofitable rivals a lot more, and possibly reduce competition for Tesla. Secondly, Musk’s FSD plans involve a lot of regulatory approvals both at the federal and the state levels. Musk may want to lean on Trump to speed things up should Trump win (Musk doesn’t get favours from Harris anyway). Moreover, Musk’s other ventures, such as SpaceX, heavily relies on government contracts, which must be a big consideration for Musk.

What if Harris wins? Will Musk face retaliation?

Possibly. It’s a risk that investors must consider. It may be impossible to know in advance how Harris wants to approach it anyway.

8. Valuation

One does not need to be good at math to know that Tesla’s valuation is rich.

Companies like GM and F with nearly double of TSLA’s revenue, are being valued at a miserly 1x forward Revenue.

Taking a growth-adjusted revenue multiple of Ford, Tesla’s market cap should be $281 billion, or just 1/3 of today’s value.

This means most of Tesla’s valuation rests on the Robotaxi narrative (Optimus Humanoid is still too far away).

Robotaxi is meant to be a higher margin business and mass volume event at a flick of a switch with regulatory approval. ARK believes the Robotaxi market will be worth $4 trillion a year - if you trust Cathie Wood that is.

Musks sees autonomous driving and robotaxi as an inevitable future, where driving a non-EV car with a steering wheel will be as niche as horse riding today. According to Musk, Tesla will be the most valuable company by a mile because they are genuinely prepared for this inevitability and is way ahead of the competition in this field.

Today’s stock price is essentially a probabilistic bet of that future playing out, while Tesla takes control of the economics of that future too.

Investors have to decide for themselves what the probabilities are and whether today’s price is worth the bet.

8. Technical analysis

TSLA Weekly (https://www.tradingview.com/x/lgGVuaba/)

My read is that TSLA is en route to its wave (3) target of $645+, before ultimately ending the cycle at $880+.

However, because TSLA has not broken the wave circle-3 (Nov 21) high nor the wave cirlce-4 (Jan 23) low so far, there is always a chance that the current upward move is a wave-B move off the Jan 2023 low. A very conservative approach would be to wait for TSLA to clear the all-time-high and then enter at the pullback.

TSLA Daily (https://www.tradingview.com/x/RdAog3el/)

On a smaller degree, TSLA managed to hold its VWAP (since the April low). Today’s reaction likely marks a march towards wave 3 of (c) of circle-a of (3). This wave 3 target zone is $353-$387, the 1.382-1.618 extension of wave 1.

Entering now with a stop loss just below the wave 2 low of $210, with a take-profit at the upper end of the wave 3 target range or even wave 5 at $400+ still offers decent risk-reward.

We have a live trade setup entering at $215.5 on October 10th, with a target of $350, which I will continue holding.

9. Rating: Equal Weight

The Good:

Tesla enjoys accelerating top and bottom line growth and expanding margins in the latest quarter. The Fed’s rate-cut cycle should benefit Tesla in terms of consumer demand. The price technicals also point to a upward runway.

The Bad:

The revenue growth is still nowhere near its 2022 level. The stock is richly valued as a conventional car company, and Musk must execute on his vision to continue justifying the stock price. There is also election risks associated with potential retaliation from Harris should she win.

Tools I find helpful:

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— Yimin