On Wednesday, Tesla reported its most recent quarterly earnings. It was, to be sure, a good day for Tesla and its shareholders. The company said it made $3.6 billion on $18.8 billion in total sales, both records. That beat expectations of $2.6 in net income. Any time you make $1 billion more in profit than anyone expected, it’s a good thing.
Every business exists to make money. The thing is, it wasn’t just impressive that Tesla made more money than expected, it’s how. It turns out that it’s a valuable lesson for every business. Let’s take a look.
During its earnings presentation, Tesla said the margin on its cars was 32.9 percent. The rest of the company (the part that sells solar panels and home battery packs, for example) doesn’t make money and, as a result, Tesla’s overall profit margin was 19.2 percent.
By comparison, no other automaker comes close. Ford, for example, had a margin of a little more than 7 percent in the final quarter of 2021.
To be clear, it’s not an exact comparison. I’m also not suggesting Tesla is a better business than Ford. They are very different companies in a lot of ways. For one, Ford sells almost as many of its F150 pickup trucks alone as Tesla sells all of its models.
I only make the comparison because 32.9 percent is not the normal profit margin for making a car. It’s closer to the margin Apple makes selling iPhones.
The reason that number is so important is quite easy–Tesla is a business and businesses have to make money. That’s not something Tesla was very good at for a long time. Then, when it did start to turn a profit, it was mostly because of regulatory credits the company sold to other automakers who use them to meet emissions goals.
Last quarter, for example, the company made $679 million from such sales, up from $518 million in the comparable quarter last year. However, Tesla says it will become less dependent on those sales to boost its bottom line, which is important as other carmakers continue rolling out EVs of their own.
It’s a good sign then, that Tesla is making its money primarily from, you know, actually selling cars. And the fact that its margin from selling cars continues to go up doesn’t hurt either.
That hasn’t been easy as inflation and supply chain constraints have put pressure on every carmaker. For example, General Motors had been shipping vehicles without some semiconductors and announced it would pause production at a plant in Indiana for two weeks this month due to the shortage.
Tesla has faced its own constraints, including a recent shutdown of its factory in Shanghai due to an outbreak of COVID-19 cases. Still, the company delivered a record number of vehicles at a record profit margin during the last quarter.
So far, Tesla has been able to sell every car it makes, at whatever price it asks. As evidence of this, the company recently raised the price of its entry-level Model 3, and it still sold more of them than ever.
“It may seem like maybe we’re being unreasonable about increasing the prices of our vehicles given that we had record profitability this quarter, but the waitlist for our vehicles is quite long,” Tesla’s CEO, Elon Musk, said during the earnings call.
“We absolutely want to make EVs as affordable as possible,” he added. “It’s been very difficult with–inflation is at like a 40- or 50-year high. Suppliers are under severe cost pressure. In some cases, we’re seeing suppliers request 20 percent to 30 percent increase in costs from the end of last year.”
And still, people continue to buy Teslas. Even as their own budgets tighten, people are willing to pay those higher prices, driving Tesla’s profit margin. That’s because people who buy Tesla’s–for the most part–aren’t just looking to buy an EV, they’re looking to buy a Tesla. They’ve bought into the brand as much as its cars. And that, it turns out, is an incredibly valuable thing for any business.