A more profitable Tesla is still a pricey ride
Summary
A surprise lift in automotive margins reversed the damage from the Robotaxi fallout, but its valuation is now far above even AI stars.
Elon Musk thinks of Tesla as an AI company. He’d be seriously bummed if it were valued like one.
Tesla’s third-quarter results gave the EV maker’s stock price a strong boost on Thursday, recovering the ground lost following the company’s disappointing Robotaxi event earlier this month. The reaction wasn’t entirely unwarranted: Tesla managed to surprise Wall Street by reversing the steady decline its automotive gross margins have suffered over the past two years.
Strong growth in sales and gross profits in the company’s energy generation and storage segment also helped. Tesla’s total operating profit came in at $2.7 billion for the quarter—37% above Wall Street’s consensus forecast, according to FactSet.
Still, Tesla’s overall growth is far below normal, or at least what has long been the company’s version of normal. Total automotive revenue rising 2% year over year in the third quarter comes after two consecutive quarters of declines. That is also a fraction of the 45% growth Tesla’s core business averaged on a quarterly basis from 2020 through 2023. The world’s largest EV maker can’t escape the gravity of a global auto-sales slowdown.
And even the profit boost might not be built to last. “Sustaining these margins in Q4, however, will be challenging, given the current economic environment," said Tesla Chief Financial Officer Vaibhav Taneja on the company’s conference call on Wednesday.
Analysts boosted their profit targets anyway. The consensus projection for Tesla’s per-share earnings over the next four quarters rose more than 5% following the company’s report. But even that doesn’t cover Tesla’s chunky valuation; Thursday morning’s 17% jump puts the stock price at around 79 times forward earnings. That is more than twice the multiple that megacap tech giants like Apple, Microsoft and Amazon fetch.
If Tesla were valued on par with Nvidia, whose chips Tesla is snapping up to power its ambitions in AI, autonomous driving and robotics, the stock price—and a good chunk of Musk’s net worth—would be about 48% below their current level.
Hence, Tesla needs much, much more to go right than just a recovery in the global EV market. But its biggest ambitions are distant and by no means slam dunks. Musk reiterated his plan to have Robotaxis begin production in 2026. The ultimate fate of that business, though, lies in the company’s ability to clear the necessary regulatory hurdles for self-driving cars in states like California—not to mention catching up to rivals like Waymo that are already on the road.
“While compute capacity growth is a positive indicator that will support accelerated learning cycles, we remain cautious on Tesla’s system performance vs. peers given lack of driver-out regulatory approvals and limited detail on miles between engagement," wrote Colin Rusch of Oppenheimer on Thursday.
The humanoid robot called Optimus is even more of a long shot—not that Musk qualifies it as such. “So I think it has a good chance of being the most valuable product ever made," Musk said on Wednesday’s call.
Even some of Tesla’s near-term targets look ambitious. After scrapping its Model 2 project earlier this year, the company reiterated a plan to launch a “more affordable" car in the first half of next year, though details on that vehicle remain sparse. And Musk projected vehicle-sales growth of 20% to 30% next year—a sharp jump from the 13% pace analysts were projecting, according to FactSet.
“We struggle to handicap the unit growth, given the uncertain timing of volume production, a limited sense of how different the offerings will be relative to the current Model 3 and Y, and true delivered price," wrote Toni Sacconaghi of Bernstein.
Tesla has to get an awful lot of rubber to meet the road.
