Tesla (TSLA)

Electric vehicle pioneer Tesla (NASDAQ:TSLA) announced better-than-expected revenue in Q3 CY2025, with sales up 11.6% year on year to $28.1 billion. Its non-GAAP profit of $0.50 per share was 10.5% below analysts’ consensus estimates.

Key Topics & Areas Of Debate

The vast majority of Tesla’s revenue (74.9%) comes from electric vehicle (EV) sales, making metrics like units delivered and average sale price crucial for our analysis. However, two emerging questions are shifting the conversation beyond just car sales.

Can the Services segment - mainly consisting of low-margin maintenance and repairs today - decouple from vehicle sales with Tesla’s new AI-driven products?

Sparking hope for bulls are new technologies like Full Self-Driving (FSD) and a potential robotaxi fleet. If successfully commercialized, they could not only supercharge top-line growth but also lift Services gross margin from its current level.

The second question is whether Tesla’s Energy Generation and Storage division could approach the value of its automotive business. While this may seem farfetched since Energy contributed just 12.5% of revenue last year, a case can be made.

GenAI applications could be the catalyst that accelerates this business as they require vast amounts of computational power. Furthermore, as energy disruptions from extreme weather become more frequent, Tesla’s products could emerge as critical infrastructure.

One standout product we’re closely watching in the Energy segment is the Megapack, a large-scale battery system that stores and distributes massive amounts of electricity. Each Megapack can power 100 to 150 homes for 24 hours and sells for over $1 million. Megapacks also have higher margins than EVs - in fact, a single Megapack sale generates as much operating profit as around 100 Tesla automobiles.

If Tesla can scale its Energy business and expand its software Services offerings, the growth potential is enormous and could settle the debate once and for all.

Originally founded by Martin Eberhard and Marc Tarpenning in 2003, Tesla (NASDAQ:TSLA) is an electric vehicle company accelerating the world’s transition to sustainable energy.

Tesla proves that huge, scaled companies can still grow quickly. The company’s revenue base of $28.18 billion five years ago has more than tripled to $95.63 billion in the last year, translating into an incredible 27.7% annualized growth rate.

Over the same period, Tesla’s automotive peers Rivian, General Motors, and Ford put up annualized growth rates of 171%, 10.1%, and 7.7%, respectively. Just note that while Rivian has the most similar vehicles to Tesla, comparisons aren’t exactly apples-to-apples because it’s growing from a much smaller revenue base and selling its EVs at a loss.

Long-term growth reigns supreme in fundamentals, but for disruptive companies like Tesla, a half-decade historical view may miss emerging trends in autonomous vehicles and energy. Tesla’s recent performance shows its demand has slowed significantly as its revenue was flat over the last two years.

This quarter, Tesla reported year-on-year revenue growth of 11.6%, and its $28.1 billion of revenue exceeded Wall Street’s estimates by 5.7%. Looking ahead, sell-side This projection is fine for a company of its scale and illustrates the market is baking in some success for its newer products.

Revenue: The Race For Dominance

Tesla is primarily an automobile manufacturer today and generates 74.9% of its revenue through the sale and leasing of EVs. It historically produced expensive, high-end EVs, but after years of operating losses, has shifted its focus to the mass market with affordable vehicles. The Model 3 and Model Y (released in 2017 and 2019) are the headliners of this story, and we’ll dive into their impacts below.

Over the last five years, Tesla’s vehicles sold grew by 31.8% annually to 1.71 million units in the last year. This is meaningfully above the its 24.1% annualized growth rate for Automotive revenue, implying that its average vehicle price fell.

Specifically, Tesla's average revenue per vehicle sold was $41,805 for the trailing 12 months, noticeably lower than the $56,348 price tag in 2020.

These unit and pricing trends uncover three facets of the company’s automotive business:

1) It has achieved its goal of selling more Model 3 and Model Y vehicles, which carry lower price tags than other models, 2) the scaling production of its mass-market models is boosting manufacturing efficiency because it lowers the fixed cost per vehicle sold, and 3) rather than increasing profitability by reaping the cost-saving benefits, Tesla is passing them to customers through price reductions.

In Q3, Tesla’s vehicles sold rose by 7.4% year on year to 497,099 units, beating Wall Street’s expectations. Putting this print side-by-side with its 5.9% Automotive revenue growth suggests an average vehicle price of $42,657, similar to the same quarter last year.

Unit Economics: The Impact Of Price Cuts

There’s no denying automobile manufacturing is a tough business. Few upstarts succeed because incumbents like General Motors and Ford can afford to break even on the initial sale of vehicles and instead make money on parts and servicing, which come many years down the line. This is why new entrants such as Rivian have negative gross margins - they must price competitively, and their fleets are too young to generate substantial aftermarket revenues.

Tesla does not disclose the operating profitability of its segments, but we can analyze the gross margins of its various divisions to see how it stacks up. For Automotive, this metric reflects how much revenue is left after paying for the raw materials, components, and direct labor costs that go into manufacturing and producing its vehicles.

Thankfully for investors, Tesla has crossed the chasm as its Automotive segment boasted an average gross margin of 22.4% over the last five years. While it may be low in absolute terms, Tesla’s margin was best in class for the industry and illustrates its superior pricing power and procurement capabilities. Its breathing room also explains why the company can squeeze its competitors by slashing prices.

Looking under the hood, Automotive’s annual gross margin fell from 25.4% five years ago to 17.5% in the last year. This is a direct result of its price cuts and shows the company is sacrificing higher profits today to increase its installed base and potentially secure longer-term recurring revenue streams. The trend slightly improved this quarter as its gross margin stabilized, but we wouldn’t put too much weight on short-term results.

Revenue: Powering The Business

Tesla is known for its EVs, but the biggest debate surrounding the stock isn’t directly tied to car sales. What the market ponders is whether Services (12.6% of total revenue) and Energy Generation and Storage (12.5% of total revenue) can become much more vital parts of its business. Services has recurring revenue characteristics and a pipeline of bold new AI-driven products while Energy has higher margins than Automotive and a huge underpenetrated market opportunity. You can see why there is excitement here.

Digging in, Services revenue grew at a 40.3% annualized rate over the last five years, 12.6 percentage points faster than total revenue. The previous two years saw deceleration as it grew by 23.6% annually, though this isn’t concerning since it’s still expanding quickly.

Switching to Energy, revenue grew at a fantastic five-year pace, clocking in at 48.2% annualized. This performance, like Services, trumped its total revenue growth by 20.5 percentage points. On a two-year basis, growth was 42.5%. This is slower than its five-year rate, but it’s impressive nonetheless as it worked off a $5.91 billion revenue base.

This quarter, total revenue increased by an unimpressive 11.6% year on year while Services and Energy grew by 24.6% and 43.7%, respectively. If this trend continues and it can consistently win EV market share, Tesla’s stock price could see some support.

Unit Economics: What Can Supercharge Profitability?

Energy is currently Tesla’s shining star as it’s the fastest-growing and most profitable segment. It posted a gross margin of 29% over the past 12 months, up from 6.2% five years ago. Once the renewable energy market matures, margins could certainly rise further if the company continues developing premium products like the Megapack, an innovative battery system that stores and distributes electricity.

Conversely, Services has much to prove as its paltry gross margin of 6.3% over the last year was a drag on the company’s overall unit economics. This margin is underwhelming because the business mainly consists of physical parts and repairs. It’s also surprisingly below Ford and General Motors’s 15-25% for the segment - a wide gap exists because the EV supply chain and ecosystem are less developed, resulting in higher servicing costs for Tesla.

Although we typically assess long-term historical trends, they aren’t as relevant for Services. The debate centers around whether Full Self-Driving (FSD) and robotaxis will ever be fully commercialized, and their impacts aren’t reflected in company financials yet. We lack details and management guidance on these ventures, but bulls would argue that margins could move structurally higher if these revenue sources scale. Bears would argue these business lines are a pipe dream.

This quarter, Services and Energy produced gross margins of 10.5% and 31.4%, respectively, encouraging signs as they both eclipsed their five-year averages (4.4% for Services and 20.3% for Energy). Energy was particularly noteworthy as it also exceeded the core Automotive segment.

We’ll keep a close eye on Tesla from here. Should any of the company’s ambitious bets (FSD, robotaxis, Megapacks) succeed, bulls will be rewarded handsomely because revenue and profitability would surge, allowing the market to assign the stock a premium valuation multiple due to the higher proportion of recurring, higher-margin, and secular revenue streams. However, if these initiatives fail to materialize or take longer than expected, shareholders could be in for a bumpy ride.

While gross margins showcase the unit economics of a business, operating margin is a more holistic measure of profitability because it displays the portion of revenue remaining after subtracting all day-to-day expenses, including the cost of sales we talked about earlier to selling, marketing, product development, salaries, and rent.

Segments aside, Tesla’s consolidated gross margin averaged 20.4% over the last five years, a tough starting point for operating profits. Its average operating of 9.7% at that time was uninspiring for a scaled an industrials business and shows it was held back by its large cost base.

Analyzing the trend in its profitability, Tesla’s operating decreased by 4.8 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Tesla’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its margin trajectory could reverse in the future if it can sell more EVs (to further sweat its fixed cost base) and scale its high-potential Services and Energy businesses.

In Q3, Tesla generated an operating profit margin of 5.8%, down 5 percentage points year on year. Since Tesla’s operating decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

In the coming year, Wall Street expects Tesla to maintain its trailing 12-month operating of 4.7%.

We track the long-term change in earnings per share (EPS) alongside revenue and margins because it shows whether a company’s growth is profitable and what else affects shareholder returns.

Tesla’s EPS grew at an astounding 23.6% compounded annual growth rate over the last five years. However, this performance was lower than its 27.7% annualized revenue growth, telling us the company became less profitable on a per-share basis as it expanded.

We can take a deeper look into Tesla’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Tesla’s operating declined by 4.8 percentage points over the last five years. Its share count also grew by 6.4%, meaning the company not only became less efficient with its operating expenses but also diluted its shareholders.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Tesla, its two-year annual EPS declines of 30% mark a reversal from its (seemingly) healthy five-year trend. These shorter-term results were driven by its EV price cuts. We hope Tesla can return to earnings growth in the future.

In Q3, Tesla reported adjusted EPS of $0.50, down from $0.72 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term adjusted EPS growth than short-term movements. Over the next 12 months, Wall Street expects Tesla’s full-year EPS of $1.77 to grow 16%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills or invest for the future.

Tesla has shown poor cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 6.6%, lousy for an industrials business.

Taking a step back, we can see that Tesla’s margin dropped by 1.6 percentage points during that time. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal it is in the middle of an investment cycle as it pursues new AI technologies such as a robotaxi or humanoid robot fleet.

Tesla’s free cash flow clocked in at $3.99 billion in Q3, equivalent to a 14.2% margin. This result was good as its margin was 3.3 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends are more important.

Over the next year, analysts predict Tesla’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 7.1% for the last 12 months will decrease to 2.9%.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Tesla hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 29.6%, splendid for an industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. While Tesla’s ROIC fell recently due to its price cuts, the broader trend is still healthy as its ROIC is higher than a few years ago. This is because it’s investing aggressively to capture the AI opportunity. Only time will tell if these investments bear fruit in higher long-term ROICs.

Big corporations like Tesla are attractive to many investors in times of instability thanks to their fortress balance sheets that buffer pockets of soft demand.

Tesla has an eye-popping $41.65 billion of cash on its balance sheet (that’s no typo) compared to $7.7 billion of debt. This $33.95 billion net cash position is 2.4% of its market cap and shockingly larger than the value of most public companies, giving it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Tesla blew past analysts’ revenue expectations this quarter. We were also happy its revenue narrowly outperformed Wall Street’s estimates, as Automotive and Services beat while Energy was in line. On the other hand, its EPS missed. Overall, this print had some key positives. The stock traded up 1.6% to $440.70 immediately following the results.

Updated: December 4, 2025 at 10:48 PM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Tesla falls short of our quality standards. Although its superb long-term revenue growth driven by Energy underscores its exciting and untapped market opportunity, its falling returns show it may be getting harder to find good investments. And while the company’s stellar ROIC suggests it has historically done an exceptional job picking markets to invest in, the downside is its operating margin decline fuels the bear argument.

Tesla’s price-to-earnings ratio based on the next 12 months is 216.6x. This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $392.93 on the company (compared to the current share price of $453.39), implying they don’t see much short-term potential in Tesla.