As we know, in Q3 in the earnings report, Tesla showed us they are now hitting above
30% margins. Obviously this is unprecedented in the auto industry, in fact legacy autos
barely make any margin, and obviously have to save something for the car dealer, they
generally make more profit on the financing and parts and servicing side of the business.
As they say, whenever any industry gets old enough, the profits are pretty much gone.
But without profits, it becomes harder to innovate, you are playing with scared money.
It's more difficult to take risks, or have funds left over to re-invest in the likes
of R & D. You are less likely to take on experimental manufacturing techniques like, I don't know,
perhaps the gigapress.
Tesla's massive profit margins are such an advantage it is definitely not discussed enough.
Even aside from the fact it just simply gives Tesla so much more profit to grow the company,
along with extra incentive to grow, and re-invest, and more research and development, it also
allows them so much more flexibility with their supply and demand.
When it comes to ramping up, then Tesla will eventually find a sweet spot, where there
is the ultimate amount of profit between margin and demand. When Tesla finally have an abundance
of batteries, and their production lines have hit 10 times speed, then Tesla can create
however much supply is necessary. If there is too much supply, then Tesla have their
margins that they can reduce somewhat, to then increase demand to further meet supply.
There will eventually be a balance. This is really monopolistic behavior. Yes, you can
call Tesla a monopoly in a lot of ways, although they may not be by definition Tesla do still
have a lot of the behavioral characteristics of a monopoly, and can get away with certain
actions, as there is no competition. Competition is what stops monopolies. For example Tesla
could raise all the prices of their cars by a further $10,000, and you know what, I think
Tesla will still struggle to make enough cars to meet demand. Actually I think if a Model
3 was $10,000 more expensive, then it is still better value than the equivalent BMW 3 Series,
if you factor in the total cost of ownership.
And that's when Tesla have 30% margins. Well you have often heard me talk about Tesla hitting
40% margins too. I get some comments saying that is ridiculous, this is a car, not an
iPhone. Yes, I concur, it is hard to believe. But so is everything that this company has
done to date. It's beyond impressive. We now have the quickest car in the world, at a fraction
of the cost of a Ferrari or Lamborghini, let alone the Buggati which is the closest in
performance. Ok sure the Buggatti does have a higher top speed, but really, how often
do you need to go above 200 miles an hour anyway, not overly often. Fastest I have ever
driven is just over 180, and that felt fast enough, yes I was on the Autobahns.
But as we know, 4680s are coming, along with structural battery packs, front and rear diecasting,
and new custom built facilities, that Tesla has learned from the biggest manufacturing
nation on the planet, added to that now German engineers as well, that know a thing or two
about building quality cars. Tesla is evolving their factories every time for more efficiency.
Anyway, how about we do some math, and see if we can work out what margin the Texas Model
Y might actually reach. It will be an indicative approach, using the best numbers we can find,
but I think still be quite interesting, and likely not too far from a possibility.
Firstly let's just work with the long range Model Y, although it's highly likely the performance
version could have an even higher margin. I believe to start with this will be the best
selling Y from Texas.
Alright lets get started, ok obviously this 30.5% margin we saw in Q3 was all models and
factories combined. But I think we can imagine that the Model Y, what with have rear diecast
molds, probably fits in about there, especially for the Long Range version. So we will use
that as the base margin. Except, we are actually not really at 30.5%.
I don't think this is a fair margin, as it is including regulatory credits. When I remove
regulatory credits, then its actually only 29% margin. Sure, we might still get credits
for a while longer, but they are already starting to dwindle quite a bit.
With that we can calculate the cost of the car, except we don't know the price. As Tesla
have been raising their prices all year. So therefore need to guess what the average price
of the Model Y was, when customers that ordered the car, received it in Q3. Going back on
the waiting list at the time, I think we are are between $51,000 and $52,000. Therefore
I am going to take an average of $51,500 as the price.
With that we have a production cost of just over $36,000 for the Model Y for the ones
that were delivered in Q3.
Now obviously the biggest difference in cost is going to be the 4680 batteries.
As we know the Long Range Model Y is currently using the 2170 batteries.
Cairn Energy Research Advisors, a consulting firm specializing in electric vehicle battery
research, says the cost of 2170 battery is $158.27 per kilowatt-hour. This was last year,
so although I don't think we have seen any changes to the 2170 batteries, perhaps this
price is now down to $150 per kWh.
I think it might have actually been Rob Maurer of Tesla Daily, that calculated the 4680 batteries
will be down to $56. I have also heard other credible sources say similar cost points too.
To give you some idea, there has been this idea that once batteries can get down to a
cost of $100/kWh then EVs will be at parity with ICE cars. Of course that doesn't mean
they can make enough EVs to replace ICE cars.
This gives us a cost saving of $7,000. That is potentially $7,000 more profit per every
Model Y Long Range sold from Texas, compared to Shanghai or Fremont.
This is just the battery, well what about the structural battery pack, and now using
the front diecast molds too. I have to guess this, and I think I am being conservative,
but I think those could save $1500. They are major manufacturing advances. If anyone has
a better estimate, then let me know in the comments, I haven't heard anyone talk about
the cost savings per vehicle on those before. Although we know that the front and rear diecasts
combined remove an impressive 600 or so robots from the production line. So it surely has
to be a decent saving.
Now we have not factored in all the extra efficiencies we might expect to see from the
Texas factory. And dare I suggest perhaps further cost savings in manufacturing, since
say, the last factory Tesla opened almost a year ago, it's highly possible they may
have learned a thing or two since then. Along with more on-site vertical integration.
On the other hand, we also have somewhat higher labor costs in Texas than we do in China,
so perhaps they might level themselves out there.
Ok, when we factor in our new cost of producing a Model Y, and take the average price that
we used, then we come in at 45% margin. Wow, That is even higher than I thought. 45% margin!!!
I believe the iPhone is only 42% margin, except Teslas cost a lot more than iPhones do.
Oh but wait, we have had supply chain issues, and the price of many commodities has risen,
like steel, and we may see more inflation in this way. Therefore I think that we should
factor in some of that too. I have added a further $1500 on extra parts for this reason,
to counteract the inflation Tesla may have seen. Which still gives us 43% margin, not
too bad.
Hang on, come to think about it, Tesla have actually compensated for this inflation now,
haven't they, and they have actually raised prices as a result. Except they have raised
prices significantly higher than simply covering their additional costs, Tesla have raised
prices to try and come closer to meeting their demand. As for our $51,500 price we estimated,
well believe it or not, the Model Y Long Range is currently for sale at $59,000 now, which
is $7,500 increase from back then, or nearly 15% more.
Therefore we should really be working on our margins at that price point shouldn't we?
Of course we should, as that is the price that it will be when people start ordering
when Texas is up and running.
Well, that gives us an even 50% gross margin on the Model Y in Texas. I did not expect
this. Yet at the same time, I think all this math checks out. And I know, I can already
predict the comments coming, that I am so wrong to think Tesla can hit 50% margins,
but before you write that comment, please show me the math that says otherwise. And
I agree with you, it is hard to believe, just like everything else this company does, like
the Plaid doing 0 to 60 under 2 seconds, it's still hard to believe, yet we witnessed it.
And ok, perhaps you can adjust some of these numbers too, accordingly, maybe there is more
inflation, maybe the 4680 batteries will take a couple of years until they are producing
at that margin. But I am only using the numbers that we have best at our disposal, and trying
to avoid making them up accordingly.
Ok, if you have finished writing you comments, shall we proceed? Yea, we aren't finished
yet. Ok sure there are options like the wheels, paint, extra seats, these all carry high margins.
But what about the software. The Model Y has an extra that you can upgrade the performance
of your Model Y from 4.4 seconds to 60 to 3.9 secs. This costs $2,000. That is a huge
jump in performance, and when you compare a European high performance car, that offers
some special edition with an increase in acceleration, likely not as high as that, then usually you
are looking at closer to $10,000 or more.
Now I don't know how many people do order this upgrade, or find it necessary, and I
admit I am guessing, but let's say 25% of consumers order it. This is 100% profit, therefore
we can add an additional $500 on to the price, 25% of $2,000 is $500. Now if it makes you
feel better, in that $500 we can also include all the extra margins we receive from upgrades
like the pain and wheels.
No, I haven't forgotten the other software upgrade either. Of course I am referring to
FSD. Except instead of $2,000, FSD is $10,000, yes some customers will also use subscription
model, but over the lifetime of the vehicle that will end up costing more than $10,000
anyway, and we need to put a price on it. Again software, with 100% margin. But Tesla
doesn't have full autonomy yet, so they actually have to defer a large proportion of this revenue.
What percentage, we do not know, but we would guess at perhaps around 50%.
We would hope that FSD actually does reach full autonomy within perhaps 2 years. Perhaps
not to the level of a Robotaxi yet, but enough for private passengers, at least to a level
where Tesla can realize 100% of the FSD revenue, along with it being so good, that more customers
want to have it anyway.
Now it would appear the current take rate in the US for the Model Y is 20%. Now FSD
is actually already being included in our margins, however, it is being included in
as the global take rate across all models, which is actually only 11%. And if we estimate
that Tesla are using 50% deferred revenue, then our initial margin included 11% of 50%
of $10,000, or $550.
Now instantly we can add an additional $450 there, to average it out for Model Y FSD take
rate in the US. That brings us now to 51% margin. But what about in 2 years time, when
and if FSD is feature complete. Well we can realize 100% of revenue then, and perhaps
adoption increases to 30%. That would mean each Model Y then has the additional price
of an average of $3,300. i.e. 30% of $10,000.
We are already factoring in $1,000 per vehicle, so we can add an further $2,300 per vehicle.
Taking us to 53%.
Of course in 2 years time, we would expect even more advances, vertical integration,
efficiencies, technologies, manufacturing techniques, added features, and reduced costs.
But let's not be too greedy.
Oh wait, we could be a fraction more greedy perhaps, as lets not also forget all Tesla
prices likely are reduced $8,000 next year with a rebate. I am guessing demand will be
impacted by these discounts, and Tesla might have to make some more necessary price adjustments.
Even if Tesla just raised their prices a further $2,000, then we are at a crazy 54%. Ok it's
possible Tesla wouldn't be able to hold their prices up for a further 2 years until FSD
maybe feature complete, but who knows, I would say it very likely with the rebate lasting
10 years. And more people discovering EVs and Tesla are the obvious future.
Ok, now that was a bit of work, let me know in the comments if you want me to do it all
again using a standard range Model Y, when Tesla have ramped up their own in-house LFP
batteries.
Now bear in mind, this is just Texas we are doing, Berlin margins might be different.
And also remember these numbers are indicative only, but really, even if Tesla reached 40%
margin, then that's good enough, for lack of better word. Highly impressive is more
apt, but if we are above 50%, then I don't really have the words to describe such an
achievement. Except to say, don't sell your shares if you don't have to, as this company
looks like it might do pretty well.
There could be future events that affect margin, such as higher inflation. However, that will
likely be counteracted by raising prices. The main thing that brings down prices is
competition, Tesla really doesn't have any, I have been searching high and low. Then the
other thing could be a recession, and perhaps Tesla will need to adjust their prices if
fewer customers can afford new vehicles. But hey, they seem to have enough margin to do
that, and I have done a video about how Tesla can weather a recession.
Bear in mind, this is a video on how good Tesla's margins could be, I could have equally
made one on how bad they could get, if unkown events were to unfold. I am doing this based
on what we expect and hope to happen for the company.
Also just think how much harder it is to catch up, for lack of better word, to a company,
that has this much extra profit that can used in R & D, and growth. Compared to every other
EV company that are losing money each quarter, and have a limited about capital.
Its not really percentage that is so important either, but actual dollars of gross profit
too. Calculate how much additional gross profit Texas brings in at 500k run rate, which we
might expect by Q4. If we removed the extra FSD income, we are at $32,000 gross profit
per vehicle. That is $16 billion additional auto gross profit.
For comparison, we were under $4,000 last quarter, annaualized is just under $15 billion.
In other words, this factory alone will be producing as much gross profit as all factories
combined in Q3, and Q3 includes regulatory credits. But at the same time, OPEX shouldn't
have increased by much either, implying the vast majority of this would go to opearting
income, which in Q3 was $2 billion, annualized at $8 billion, in other words triple.
Might I remind you, like I said, that's a 500,000 run rate. I have an inkling that Texas
might surpass that, oh and we didn't even touch on Cybertrucks.
Ok, well whats the catch? Well Tesla are going to be able to hide these margins for sometime.
For one, their margin will likely drop quite a bit on Q1, due to these new factories ramping
up, well these are huge facilities to keep running, whilst you are only producing a few
thousand or so vehicles a month, at least to start with. They will be produced at a
loss. In fact the stock price might even drop as a result. It might take some time to ramp
up these production lines. Elon said it takes longer to ramp up, than it does build the
factories in the first place. Therefore we are not going to feel these margins for some
time.
Not only that, we only ever get overall margins of all models combined, the other factories
wouldn't have had the same advancements yet, so it will be averaged down. At least until
we start to see Berlin and Texas fully ramped up, and they become about 3/4 of all cars
Tesla produce. Then it will be much harder to mask.
Either way, I think we can all agree these margins blow our minds. Not only that, there
is no competition. Competition means that you have to act accordingly, and offer more
competitive prices. Tesla's competition can't even come in at their price point as it is.
Tesla can keep these huge margins. Teslas competition, will actually be themselves.
As they finally ramp up production and produce more cars, they will have to appeal to a wider
consumer base, and prices will have to drop.
But that doesn't even mean Tesla need to eat into margins, they just need to offer cars
that are more affordable, perhaps they offer less range and save costs by using their own
in-house LFP batteries, which may not be necessary until 2023 or so, when Tesla are finally making
them at volume production.
Or Tesla could start a Model 3 line, Tesla showed on their web site briefly that there
will be a Model 3 line at Texas, before quickly taking it down. They can just repeat all this
again with the Model 3. And a 4680 structural battery pack front and rear diecast, Model
3 Performance, has got to be one seriously fun car to drive.
On top of that, Tesla will be increasing the range and performance of their cars, as their
batteries get better and better, and they produce better yields as the production improves
over time too. Imagine the level of performance they could
generate from these cars. Just seeing what Tesla are still capable of with 18650 batteries
in the Plaid, what are these going to be like.
Like I say, these numbers are indicative, but I think promising either way.
Of course these are Tesla's high performance 4680 batteries, what's it going to mean, when
Tesla start producing their low cost LFP batteries? The potential of this company, has barely
begun.