Tesla Service Was Not Going To Be A Profit Center … But Is It Now?

Several years ago, Tesla CEO Elon Musk declared that Tesla service centers would never be a profit center for the company. Opposing the traditional approach where dealerships earn a significant portion of their revenue from service, Musk emphasized that the focus of Tesla service centers would be to break even rather than prioritize profits.

It’s interesting to note that in Tesla’s Q4 and 2023 shareholder letter, the company highlighted gross profits of about $500 million within its “services and other” business. The letter stated, “Gross profit of our Services & Other business increased from a ~$500M loss in 2019 to a ~$500M profit in 2023.”

If we examine the report section provided, we can see that “services and other” revenue steadily increased quarter over quarter from Q4 2022 to Q4 2023, with a 27% year-over-year growth in that quarter.

Looking at full-year trends, it’s evident that “services and other” revenue experienced year-over-year growth since 2019. The most significant growth occurred from 2021 to 2022, and there was a 37% growth from 2022 to 2023.

However, it’s important to note that revenue is not the same as profits. With a rapidly growing fleet, services revenue tied to total vehicle fleet size naturally increases. Nevertheless, what is driving profits and whether it aligns with Musk’s initial stance on service work profitability remains a question.

Further analysis of the report unveiled a more detailed explanation of what “services and other” captures. According to the report, “The Services and Other business continued to grow alongside our fleet in 2023, achieving record revenue and gross profit generation. The biggest drivers of profit generation in 2023 were part sales, used vehicle sales, merchandise sales, and pay-per-use supercharging. As our fleet continues to expand in the coming years, there is an opportunity for fleet-related services to become a more meaningful driver of profit generation.”

Highlighting these critical areas, it’s essential to consider the impact on gross profits versus revenue growth for each segment outlined. For instance, “part sales” naturally increased due to a larger and older fleet, raising concerns about potential price hikes on parts and their effect on profits.

Similarly, “used vehicle sales” and “merchandise sales” are contributing factors, with potential implications for profit margins and overall revenue. Additionally, “pay-per-use supercharging” presents an intriguing growth prospect, albeit one that comes with its own set of considerations.

Looking forward, these factors are poised to shape Tesla’s revenue and profit generation, underscoring the ongoing impact of the company’s evolving business model on service centers and the broader electric vehicle market.