Tesla's strategy to stimulate sales through price reductions, coupled with the financial burden of initiating Cybertruck production and other research and development (R&D) expenditures, exerted notable pressure on profits during the fourth quarter, as detailed in the earnings report provided on Wednesday.
Although Tesla achieved a remarkable milestone by delivering a record-breaking 1.8 million electric vehicles (EVs) in 2023, this success did not translate into equivalent growth in profits or overall revenue. Despite the expansion in vehicle deliveries, Tesla's profits experienced a contraction, primarily attributed to deliberate price reductions aimed at driving sales and elevated expenses linked to upcoming product development.
Furthermore, in its Q4 and annual earnings release, Tesla issued a cautionary note, indicating it is currently navigating "between two major growth waves." While the Model Y and Model 3 played pivotal roles in the company's recent success, Tesla anticipates a potential decline in the growth of vehicle sales in 2024. This projection aligns with the imminent launch of a new vehicle platform designed to facilitate the production of a smaller EV with an anticipated cost of approximately $25,000.
Following the earnings report, Tesla's shares experienced a 5.8% decline to $195.60 in after-market trading.
Regarding the $25,000 EV, Tesla's CEO, Elon Musk, disclosed that production is slated to commence in late 2025 at the company's Texas facility. He emphasized the necessity for engineers to reside in close proximity to the production line, justifying the Texas location as the most suitable. Subsequently, production is expected to expand to a yet-to-be-built factory in Mexico, with construction potentially commencing in 2026, as reiterated by Drew Baglino, the company's senior vice president of powertrain and energy engineering.
Musk outlined the company's intention to identify a third factory location outside of North America by the end of 2024, where production of the smaller next-generation EV will eventually extend after Mexico. He highlighted the incorporation of "revolutionary manufacturing technology" in the new platform.
Tesla reported a net income of $7.9 billion in the fourth quarter on a GAAP basis, an unusually robust figure that includes a one-time non-cash tax benefit of $5.9 billion. To provide a clearer financial picture, the company's operating income, excluding this benefit, amounted to $2.06 billion, reflecting a 47% decrease from the same period the previous year. This decline was attributed to increased operating expenses, primarily driven by AI and other R&D projects, the cost of the Cybertruck production ramp, and reduced revenue from its Full Self-Driving software.
On a positive note, Tesla acknowledged benefiting from a reduced cost per vehicle, encompassing raw material costs, the Inflation Reduction Act credit, and an expansion in vehicle deliveries, collectively contributing to narrowing the profit gap. On an adjusted basis, the company earned $3.9 billion, representing a 27% drop from the same period the previous year.
Tesla managed to reclaim some of its automotive industry-leading margins in the fourth quarter, thanks in part to an initiative to further reduce costs. The automotive gross margins, excluding regulatory credits, increased to 17.2%, marking the first quarterly increase since Tesla initiated substantial price reductions last year. However, the company noted in the report that it is approaching the "natural limit" of cost reductions on existing vehicles, anticipating future profits to be driven by AI, software, and fleet-based operations.
While revenue continued to grow, albeit at a slower pace than Tesla's historical performance, the company reported generating $25.17 billion in revenue in Q4, reflecting a 3% increase from the same quarter the previous year. Although this result narrowly missed analysts' expectations, who had anticipated revenue of around $25.62 billion, according to Yahoo Finance data.
Despite exercising caution regarding vehicle growth in 2024, Tesla expressed optimism about the expansion of its energy storage business, reporting a 125% year-over-year increase in storage deployments, even with a slower fourth quarter. This segment is becoming increasingly integral to Tesla's overall business, prompting the company to include deployment figures alongside its regular quarterly vehicle production and delivery reports, as indicated by Drew Baglino in the call. Elon Musk reiterated his long-standing belief that the storage business would outpace the car business, highlighting its substantial growth.
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