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    Tesla’s Q3 earnings reveal its identity as a car manufacturer, rather than a tech company

    When Tesla Unveiled Its Q3 Results: A Ghoulish Surprise Shakes Wall Street

    Tesla’s Q3 earnings report sent shockwaves through the financial markets, as it fell significantly short of already negative forecasts. This event was particularly surprising given the vast amount of unbridled optimism that Wall Street has showered upon the electric vehicle (EV) giant.

    The focus of analysts and the financial press was on how poorly the numbers performed compared to expectations. Tesla’s earnings per share for the quarter came in at a mere 66 cents, lagging 10% behind consensus estimates. This stunningly bad performance spooked investors, causing the stock to plummet over 13% from $254 to $220, wiping out more than $90 billion in market capitalization.

    During the earnings call, CEO Elon Musk’s comments further dampened optimism about Tesla’s future prospects. Musk warned that the company’s newest model, the Cybertruck, would face significant challenges in reaching volume production at an affordable price. He also highlighted the sudden increase in interest rates for buyers financing their Model 3s and Model Ys, necessitating further price reductions to ensure affordability for the masses. These statements implied that Tesla’s previously high profit margins would continue to shrink. Musk even acknowledged that the company’s exponential growth rate cannot be sustained indefinitely, stating, “It’s not possible to have a 50% compound growth rate forever.”

    Another blow to investor confidence came when Musk dialed down his usual enthusiasm about Tesla’s robo-taxi ambitions. In previous calls, Musk had emphasized the imminent rollout of Full Self-Driving (FSD) software, enabling Tesla owners to rent out their vehicles as autonomous taxis. However, this time, he refrained from providing a timetable for when the technology would be ready, and he even cautioned that FSD “isn’t ready for prime time.”

    These admissions by Musk were major downers for Tesla investors. The perception that Tesla is a unique company capable of achieving a market capitalization in the hundreds of billions, or even trillions, largely hinges on Musk’s ability to transform the carmaker into a highly profitable tech company. Musk has repeatedly pledged that once the robo-taxi revolution takes hold, Tesla will become a hardware company with software-like profit margins.

    However, the numbers tell a different story. Tesla’s recent performance and Musk’s narrative shift suggest that the company is not as special as previously believed and should be grouped alongside traditional automakers. Despite earning substantial profits from EVs, Tesla’s profitability is now on a downward trajectory, aligning more closely with its low-margin competitors.

    The evidence lies in Tesla’s diminishing profitability and increasing capital expenditures. The company’s free cash flow from operations continues to decline, while its capital expenditure keeps rising. Consequently, Tesla generates less free cash flow while acquiring more factories and assets.

    In 2021, Tesla’s average quarterly free cash flow amounted to $1.22 billion, or $4.88 billion annualized, with assets totaling $57 billion, resulting in a return on assets (ROA) of 8.5%. The following year, despite a slight increase in free cash flow to $1.35 billion per quarter ($5.4 billion annualized), assets surged to $73 billion, reducing ROA to 7.3%.

    The situation worsened in 2023. Tesla’s average quarterly free cash flow for the first three quarters was a mere $358 million, or $1.4 billion annualized. Meanwhile, its assets skyrocketed by 25% to $91 billion, significantly lowering its ROA to a mere 1.5%. This decline in profitability can be attributed to the substantial increase in capital expenditures, which rose from $5.3 billion in 2022 to almost $9 billion this year.

    To put Tesla’s performance into perspective, let’s compare it to tech giants Apple, Microsoft, and Oracle. These companies boast ROA figures of 28%, 15%, and 17%, respectively, over the past four quarters, all multiples of Tesla’s performance. On the other hand, traditional automakers like Ford and Volkswagen have free-cash-flow-to-assets ratios comparable to Tesla, with Ford at 2.0% and Volkswagen at 2.6%.

    It is increasingly evident that Tesla’s path to success lies in its ability to thrive as a carmaker in a fiercely competitive industry. Despite its initial aspirations to achieve the profitability of tech giants, Tesla’s current trajectory aligns more closely with that of its low-margin automotive counterparts.

    In conclusion, Tesla’s Q3 earnings report delivered a ghoulish surprise to Wall Street, as it fell significantly short of already negative expectations. The numbers revealed that Tesla’s performance is not as unique as previously believed, pointing toward the company’s classification as a traditional carmaker rather than a high-margin tech company. As Tesla grapples with declining profitability and increasing capital expenditures, it is clear that the road ahead may be more challenging than initially anticipated. Time will tell whether Tesla can overcome these hurdles and continue to be a successful player in the highly competitive world of automotive manufacturing.

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