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Why Tesla’s Q3 Profit Margin Isn’t What It Seems

Electric-car maker Tesla Motors is growing and changing so quickly, its quarterly numbers are already outdated before the quarter ends! For one thing, a look under Tesla’s hood reveals that the electric-car maker’s quarterly gross profit margins are actually bigger than you think.

On Nov. 5, Tesla reported its third-quarter results. Adjusted revenue came in at $593 million, excluding zero emission vehicle, or ZEV, credits. Of this amount, adjusted gross profit was $135 million, for a gross margin of 22%. That’s up from 14% in the previous quarter, and Tesla wants to boost it to 25% for the upcoming fourth quarter. This is an excellent start — but the news gets even better.

Previous inventory
Whenever a company begins a quarter, it tends to start off with a batch of inventory from the previous quarter, along with that previous quarter’s costs. This has very little meaning for most companies with little cost variance between quarters, such as General Motors or Ford . However, for a company such as Tesla, which has seen massive changes in profit margins over the last few quarters, inventory means everything.

At the end of the second quarter, Tesla had $255 million in inventory, including $78 million in “finished goods” — completed cars with few or no additional expenses beyond their delivery.

For accounting purposes, Tesla assumes that any vehicle inventory left over from the previous quarter would be first out the door in the new quarter. This means of the $593 million in sales, $78 million of it came from cars fully produced in the second quarter at 14% margins. $11 million of the $125 million third-quarter gross profit actually came from the sale of vehicles in the third quarter, which were physically produced in the second quarter.
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