The key metric investors were looking for was the automotive gross margins excluding regulatory credits (auto GM ex-credits). The Street was looking for 14.9%, a slight increase from last quarter’s 14.6%. Auto GM ex-credits jumped to 17.1%, which factored into the stock’s movement. It is important to highlight that this quarter benefited from $326m of recognized revenue from “FSD revenue for Cybertruck and certain features such as ‘Actually Smart Summon'”. However, even without this benefit, and assuming FSD has 90% margin, auto GM ex-credits would’ve been 15.8%, still beating expectations comfortably.

It’s worth noting that high margin FSD revenue is an important part of Tesla’s long-term business model, something no other car maker can claim. While the September quarter benefited from a 9-month revenue recognition catch-up, investors should consider FSD revenue as an ongoing and growing part of the Tesla investment story.

One of the other dynamics that improved profitability was Cybertruck margins, which turned positive for the first time.

The positive profitability conversation does have a caveat. CFO, Vaibhav Taneja, guided margins to be down sequentially in December.

There were three big pieces of guidance:

1) Affordable Models: There was pre-earnings concern about the timing of the affordable models in FY25. Fortunately, the language remained the same and “Plans for new vehicles, including more affordable models, remain on track for start of production in the first half of 2025.” This likely won’t be an entirely new model given the short timeline but will be a lower-end version of a current model with minor alterations. Sub-$30k with incentives is the affordable benchmark. As a point of reference, the base Model 3 is $35k with the $7.5k regulatory incentive so this price needs to be reduced by over $5k.

2) Q4 Delivery Guidance: Prior to earnings the Street had FY24 deliveries to be down ~2%. The company guided FY24 deliveries to have “slight growth”. This implies Q4 having 10% y/y growth in order to achieve positive growth for the full year.

3) 2025 Sales Guidance: On the call Elon guided FY25 sales to 20-30% sales growth, while the Street is at 15%. One aspect that Elon pointed to was the declining interest rates, which is a tailwind for vehicle sales. He said affordable monthly payments are the biggest driver for demand.

Why this is important: These factors underscore that Tesla’s growth rate should rebound to 20% plus next year, compared to what will likely be around 1% growth in 2024. That means that investors can begin to regain confidence that the broader EV space is back in measurable growth mode. Adding to Tesla’s advantage is that traditional car makers have, over the past year, reduced their investment in EVs by an average of 30%, making it more difficult for any of them to reach EV production scale and turn a profit on making EVs. Keep in mind, Tesla is the only Western car company that makes money on EVs. This dynamic gets back to the Catch-22 that I believe auto OEMs are in: Keep investing in EVs, and they lose a lot of money. Or cut spending on EVs, and they risk missing out on the shift to electric over the next decade.

It’s becoming more clear that Google and Tesla believe there’s a meaningful revenue growth opportunity orbiting self-driving taxis. Last week Waymo CEO commented to the WSJ that they expect to expand to more US cities and Europe in the near future (my guess is the next couple of years). On the Tesla earnings call, Musk reiterated that the company expects to ramp production of the Cybercab sometime in 2026, or in about 1.5 years from now. Additionally, Musk is “aiming for at least 2 million units a year of Cybercab. That will be in more than one factory, but I think it’s at least 2 million units a year, maybe 4 million ultimately”.

Taking Musk estimates at face value, and growing current Tesla deliveries at an average of 15% a year through 2032, implies that Cybercab (at 3m annual deliveries) would account for a third of total deliveries in 2032.

My sense is his math is optimistic. For example, there are about 24B annual miles driven by Uber and Lyft today. If that number grows at 10% a year through 2032, that equates to 47B rideshare miles. If each Cybercab can drive ~60k miles a year (325 days/year of operation, 15 hours/day of drive time, 2 rides/hour, average of 6 miles/ride). That means a fleet of 785k Cybercabs would be needed if Tesla had 100% of the US rideshare market. Assuming the US market is a third of the global market implies the world would need about 2.6m Cybercabs in operation. Keep in mind that these numbers are the size of the fleet, not annual Cybercab sales. If you assume an average lifespan of 4 years, that would imply around 650k annual Cybercab deliveries to service the global rideshare market.

Big picture: Cybercab will be a measurable boost to deliveries, accounting for about 15% of deliveries by 2032.

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