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Seven Takeaways From Tesla’s Electrifying Quarter

Resident Tesla bull Dr. Anirban Mahanti shares his thoughts on the company's Q3 2021 earnings report.

October 21, 2021

Tesla‘s (Nasdaq: TSLA) third-quarter 2021 earnings are in, and the results were electrifying goodness at its best. If you are into the nitty-gritty details, you will read through the beautifully crafted shareholder deck and dissect the conference call. But if you aren’t into that sort of sport, then I have you covered with this hot take!

So, how about seven (get it, S-E-V-E-N) things of note from this quarter’s report? 

  1. Automotive gross margin hit 30.5% driven by higher volumes out of Shanghai, consisting of a solid ramp in Model Y. Model S also returned to positive gross margin this quarter. 
  2. Adjusted EBITDA grew 77% to $3.2 Billion, and margin expanded to 23.3%. Tesla ramped up capital expenditure to $1.8 Billion but still generated a free cash flow of $1.3 billion. Income from operations hit $2 billion with an operating margin just a tad below 15%. Note that this exceeds the long-term margin guidance the company had previously set!
  3. Tesla paid down high-interest debt to finish the quarter with a net cash position of $14 Billion. The balance is looking more like that of a technology business, not that of a tired legacy manufacturer!
  4. Demand right now is through the roof, and Tesla plans to exceed historical production volumes for the Model S and X combo. That should be margin accretive. In the conference call, CFO Zach Kirkhorn noted that they were somewhat surprised by the demand side of the equation, noting that the “profound awakening of the desirability for electric vehicles […] caught us a little bit off guard.” 
  5. Tesla has its fingers in so many pies. Autonomy. Games. Battery design and manufacturing. Robotics. General artificial intelligence. It’s a company that puts its engineering and software skills to good use. One area to watch out for is driver safety score-driven insurance products, which the company is trialing in Texas. 
  6. The situation around prices of raw materials for batteries is a headwind for Tesla. But I would guess it is 10x worse for the legacy players that lack the volume or agility to switch commodities. Same problem for pure EV players starting their ramp now!
  7. Tesla’s trailing 12-month non-GAAP earnings per share (EPS) is $5.04. This quarter’s EPS jumped year over year by 145%. Using the trailing EPS, I calculated its price-to-earnings (PE) ratio to be around 170. For a company that’s guiding for long-term volume growth of approximately 50% per annum, with an opportunity for increasing operating leverage over time, that trailing PE isn’t egregious. It could be justified just based on expanding battery electric vehicle sales. Certainly, it doesn’t capture a lot of the upside from software sales and optionality in other verticals of Artificial Intelligence. 

Disclosure. Lead Advisor Dr. Anirban Mahanti is a Tesla shareholder, and a Tesla fan with a Model 3 and Powerwall at his home. While Anirban is objective in his analysis, you need to know that he’s also a Tesla bull, so consider the power of the electric zap when reading his hot take on Tesla.

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