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Megapacks drive Tesla’s energy segment margins upwards in downbeat quarter for EVs


Tesla’s energy storage business enjoyed its highest quarter of deployments to date as growth of its electric vehicle (EV) business slowed and earnings fell below analysts’ expectations.

The California-headquartered tech company reported its quarterly financial results for Q3 2023 after the close of trading yesterday (18 October). It recorded US$23.35 billion total revenues and gross profit of US$4.18 billion, with an operating margin of 7.6%.

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Gross profit fell 22% year-on-year and adjusted EBIDTA had fallen 24% from nearly US$5 billion in Q3 2022 to US$3.6 billion. Operating expenses on developing its Cybertruck, AI capabilities and other R&D rose, and the company has been reducing the cost of its other EVs dramatically, especially in the face of growing competition from established automakers entering the EV space.

Industry analysts surveyed by financial data group Refinitiv and quoted by CNN in a news report had forecast the company would report earnings per share of US$0.73, but instead adjusted earnings of US$2.3 billion equated to US$0.66 earned per share for the quarter.

An earnings call to explain results found CEO Elon Musk and other executives focusing largely on how Tesla has been navigating what CFO Vaibhav Taneja described as “a period of economic uncertainty, higher interest rates, and shifting consumer sentiment” with regard to the EV market.

Musk said interest rates were a macroeconomic headwind that dented consumer confidence in purchasing big ticket items like cars, and that Tesla would not go “full tilt” on its new factory in Mexico, for example, until it had “a sense for what the global economic [situation] is like”.

4GWh of BESS deployments, just 49MW of solar PV in Q3

Although gross margins were down overall, Tesla’s energy business contributed more than half a billion dollars to gross profit. With solar PV installations continuing to decline for the company, it was energy storage and related services that pushed the segment forwards.

Tesla deployed just 49MW of solar in Q3, 48% less than the 94MW it did a year ago in Q3 2022. In energy storage, 3,980MWh was deployed in the three month period, around the same as recorded for the previous two quarters of this year and a 90% year-on-year increase from 2,100MWh in Q3 last year.

Storage deployments narrowly exceeded Q1’s 3,889MWh, which at the time had been the record high for Tesla.

The energy division “is becoming our highest-margin business,” Musk said, with CFO Taneja adding that deployments of Megapack, Tesla’s utility-scale battery energy storage system (BESS) product, were “the key driver there”.

Continued growth in deployments was further made possible by the ongoing ramp of the new Megapack factory in Lathrop, California, which is targeted to reach 40GWh of annual production capacity over time. The company is also developing a Megapack factory in Shanghai, China, as reported by in April.

The CFO did caution that while sales have been strong and cost reduction efforts have been fruitful, Megapack demand is “a bit lumpy”, given that it is based on large orders coming in from utilities, developers and other customers, often for single large-scale projects.

“So, yes, we had a great quarter this period [for Megapack]. But depending upon where we are trying to deploy that product in different markets, you would see periods where there would be downward pressure on deployment…” Taneja said, adding that this is due to the need to get the product out to customers in various parts of the world as market demand shifts from region to region.

Meanwhile, the downturn in solar deployments was blamed by the company on the sustained high interest rates, it also partially blamed lower-than-expected vehicle sales as well as the move by California to end the state’s popular net metering programme for residential PV. It is perhaps indicative of Tesla’s priorities that solar wasn’t mentioned during the earnings call either by company executives or analysts quizzing them.

Also not mentioned on the earnings call was the recently-brought lawsuit against Tesla from the US Equal Employment Opportunity Commission (EEOC). The EEOC has charged the company with tolerating racial harassment of Black employees and subjecting some to retaliation for opposing harassment, a violation of federal law.

Filed around three weeks ago, the lawsuit alleges that the harassment issues have been ongoing since as early as 2015 at Tesla’s factory in Fremont, California. Compensatory and punitive damages and other measures may be sought, and it remains to be seen what impact the suit will have, but analysts on the earnings call did not see fit to enquire about it to Musk and his leadership team.

Earnings call transcript by The Motley Fool.

8 October 2024
San Francisco Bay Area, USA
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