Tech Stock or Car Company? How Tesla Really Makes Money

What is Tesla (TSLA 1.86%)?

If you ask most folks — rational, objective investors in particular — I think most of us would agree that Tesla is a car company. Sure, if you want to get specific, Tesla is an electric car company, but it’s a car company nonetheless. And yet, from the ranks of Tesla’s devoted fan base, the rebuttal comes loud, clear — and immediate:

“Tesla isn’t an electric car company” at all! Tesla is in fact “a technology company” and “an iconic, revolutionary brand specializing in making the customer and user experience sublimely frictionless.” (Seriously. When I searched for  “Tesla isn’t a car company,” that’s literally the first result that popped up, in a Medium article from independent design publication UX Collective).  

And yet, numbers don’t lie.

Infographic shows Tesla's five biggest revenue streams in Q4 2022.

Data source: Tesla January 2023 Q4 shareholder deck. 

Tesla’s five businesses (including the big one)

In Tesla’s most recent financial report, five separate but connected Tesla businesses fed into this alleged technology company‘s $24.3 billion in quarterly revenue. But would you care to guess how much of this money came from things you might ordinarily consider “technology”?

Well, “services and other” — that’s a pretty broad basket. I’d be willing to bet there’s some technology in there — but it only accounted for $1.7 billion of Tesla’s revenue, or 7% of the total.

“Energy generation and storage”? Logically, I think that’s all energy revenue. But sure, we’re talking solar panels and batteries here, so go ahead and call it technology. For those $1.3 billion, add another 5% for the “technology company” crowd.

“Automotive leasing”? Sorry. That’s financial through and through.

And “automotive regulatory credits”? I don’t really know how you’d go about classifying those, aside from calling them “the cost of keeping the government happy.” But it’s certainly not technology. Sorry, Charlie.

Long story short, at most, $3 billion of Tesla’s $24.3 billion in Q4 revenue was technology, meaning 12% or thereabouts. The bulk of Tesla’s money, however — $20.2 billion, or 83% of the total — came exactly from the place you’d expect it to come from: cars.

Because Tesla is a car company.

The good news for investors

All this being said, however, let’s not lose sight of the most important fact about Tesla: It’s a very good car company, and a very profitable car company.

In Q4 2022 alone, Tesla generated a robust 16% operating profit margin from its business. (Which is selling cars, by the way.) That profit margin dropped a bit from the 16.8% that Tesla averaged across the whole of 2022 but rose significantly from the 12.1% margin Tesla earned in 2021 and the 6.2% margin Tesla earned in 2020. And not for nothing but — when was the last time you saw Ford Motor Company or General Motors report a double-digit operating profit margin?

I’ll give you a hint: Never. As far back as data from S&P Global Market Intelligence goes, neither Ford nor GM have ever generated double-digit profit margins from their car businesses. (Ferrari does, granted — albeit on a much smaller sales base).

And yet this is exactly what Tesla has done. Stomping on the accelerator from a standing start in 2003, Tesla raced ahead of its larger rivals to beat them both on profitability in just 20 years. True, at a price-to-earnings ratio of 49.4 today, with a projected earnings growth rate of 22.6%, Tesla stock may not look particularly cheap at a PEG ratio of 2.2.

The great thing about the stock market, though, is that sometimes even great companies like Tesla go on sale. In fact, barely a month ago, it was possible to buy Tesla stock for less than 1x its PEG ratio.

If Tesla ever gets that cheap again, I’ve got just one bit of advice for you: Buy it quick — before Tesla zooms higher again.