Tesla has told us the metric they're optimizing for is operating margin - it's important to understand this KPI well and it's essential for anyone invested in
$TSLA
This also happens to be one metric I think Wall St. is on the fence about, which is building in upside to
$TSLA stock IMHO
Oftentimes people use EBIT (earnings before interest and taxes) interchangeably with operating margin (or profit), but that's usually not accurate
EBIT includes "other" revenue (investment income) whereas operating margin only focuses on profitability generated from core business operations
As Tesla's cash balance (and thus investment income) grows, this is an important distinction
Op. margin shows us how efficient Tesla is at generating profit from its fundamental business given each dollar of revenue
Operating margin formula: operating profit/revenue * 100
Operating profit is found by taking revenue - COGS (cost of goods sold) to get gross profit
Then we substract operating expenses from the gross profit (R&D, SG&A, depreciation etc.) to get to our operating profit number
People also erroneously say "Tesla's margins are suppressed now due to the Austin/Berlin/Lathrop factory ramps" implying these will go away
Yes, they will, but only to be replaced with new factory ramps as Tesla progresses to 20m units/year. Same on the energy side with Megapack factories and continued R&D (home HVAC, van, etc.)
Tesla is also moving some R&D costs like 4680 production into COGS as these cells are directly used in vehicles being sold and if/when Elon gets a new compensation package any CEO SBC (stock based compensation) would be a drag on Tesla's operating profit
However, here's where things get interesting
Tesla's operating margin the past 5 years:
2023 (1H): 10.5%
2022: 16.8%
2021: 12.1%
2020: 6.3%
2019: -0.3%
2018: -1.8%
Wall St. is now faced with a conundrum: what will the "new normal" be for Tesla's operating margin? After years of low interest rates, high demand, low supply and early adopters, we're now in a world with restrictive (high) interest rates and we're in the chasm between early adopters and the mainstream
Despite all of these headwinds, each time Tesla gets a new factory through the ramping phase, it builds a new profit base (like stacking legos), so the next cycle of new factories ramping over time will have less of a negative impact on operating margin
But the real magic lies in two places
• Tesla's relentless COGS reduction
• SaaS margins looming (FSD, app store, upgrades) as the fleet grows
So while we'll have op. margin compression in '23, I think much of Wall St. has been lulled into thinking this is the "new normal"
When in reality we're about a year away from Austin, Berlin and Lathrop being through the ramp (and drag on margins phase), serving as more "profit legos" stacked up
Eventually we'll see a world with less restrictive interest rates and it may just align (after a lag) with the timing of a robotaxi release from Tesla where operating margins could take off from the current expectations thanks to FSD sales and Tesla's continued efforts to reduce COGS better and faster than anyone else (thanks in part to incredibly strong supply chain relationships built over a decade)
In summary: we should all be watching Tesla's operating profit because it's what Tesla is optimizing for in this stage of growth. While compression is expected this year relative to the past few years, I do not believe this is a "new normal". Tesla still has to earn the upside here (volume production and solving FSD are very hard), but it really does feel like a matter of when, not if, Tesla surpasses its record high for operating margin (19.2% - Q1, 2022)
Patience should be rewarded 🚀