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Did Tesla’s Gross Margin Improve in Q4 2018?

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Gross margin in Q4 2018

In the fourth quarter, Tesla’s consolidated gross profits stood at $1.44 billion, down 5.3% from $1.52 billion in the third quarter of 2018 and up 228.8% from $439 million in the fourth quarter of 2017.

The company’s fourth-quarter consolidated GAAP (generally accepted accounting principles) gross margin fell to 22.8% from 25.0% in the third quarter. However, this gross margin reflected a significant improvement from 16.2% in the fourth quarter of 2017. As it happened in the case of its revenues, Tesla’s fourth-quarter consolidated gross margin was better than analysts’ estimate of 20.9%.

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Model 3 margins remained flat but strong

In the fourth quarter, Tesla’s GAAP gross margin from the automotive segment was at 24.3%, lower than 25.8% in the third quarter but better than 18.9% in the fourth quarter of 2017. In the fourth quarter, its gross margins from Model S and X weakened with the help of cost-cutting measures, which also helped the company to reduce its Model S and X prices in China (MCHI) recently.

NIO (NIO), which has been competing with Tesla in China recently, launched its lower-priced SUV electric model, the ES6, in December 2018, which could be another reason why Tesla decided to cut its vehicle prices in China.

Until the first quarter of 2018, Tesla’s automotive margin deteriorated partly due to the Model 3 production ramp-up phase. On the brighter side, Tesla’s gross margins from Model 3 were in positive territory in the second quarter, which further improved in the third quarter last year. This improvement should boost investors’ confidence in the company’s ability to improve its gross margin.

Gross margin from other segments

In the fourth quarter, Tesla’s energy generation and storage segment’s gross margin fell sharply to 11.5% from 17.2% in the previous quarter. However, it was still better than the energy segment’s gross margin in the fourth quarter of 2017 at 5.5%.

The company attributed this decline in the energy segment margin to the seasonality factor driven by lower lease revenue during the winter season and the solar energy production decline.

Continue to the next part where we’ll take a quick look at some key factors that could affect Tesla’s valuation in the first quarter of 2019.

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