Tesla Inc (NASDAQ:TSLA) shares are expected to open higher today after the electric car manufacturer unveiled a mixed set of second-quarter earnings overnight, with scepticism remaining in Wall Street that the company can deliver its production numbers for the full year.
Revenue of US$16.9bn for the quarter was up 42% on the prior year and adjusted earnings per share of US$2.27 were up 57% year on year but down 32% compared to the first quarter as profit margins were squeezed.
While revenue was short of Wall Street expectations, earnings were higher, though reported earnings were hit by impairments to cryptocurrency holdings.
Boss Elon Musk and finance chief Zach Kirkhorn blamed the costs from the Covid shutdowns in Shanghai for gross margins dropping to 27.9% from 32.9% in the first quarter and 28.4% a year ago.
Also weighing was a 13% uptick in operating expenses from higher raw material, commodity and logistics costs.
To counterbalance this, prices had been raised “quite a few times", Musk admitted on the post-earnings call with analysts and investors. “They’re frankly at embarrassing levels,” he said.
“But we’ve also had a lot of supply-chain and production shocks and we’ve got crazy inflation. So I am hopeful — this is not a promise or anything, but I’m hopeful that at some point we can reduce the prices a little bit.”
Weaker demand?
Amid worries about a global recession, Musk and chief financial officer Zach Kirkhorn were asked about whether demand was weakening.
Musk said there had been “some” weakening “maybe” and Kirkhorn said any fall-off in demand was “not material”.
Musk added: “We have so much excess demand that it’s not an issue for us” and that the “problem is overwhelmingly that of production”.
He held back from updating his production forecast for the rest of the year, apart from saying that the company was likely to achieve “record” output, suggesting he was sticking with the previous guidance for a 50% increase in deliveries.
Musk said Tesla had sold 75% of its bitcoin holdings to maximize its cash position due to the uncertainty about when the Shanghai lockdowns would lift, adding US$936mln of cash to the balance sheet.
“This should not be taken as some verdict of bitcoin,” Musk said on the call. “We haven’t sold any of our dogecoin.”
The shares are set for a 3.4% gain to US$767.30 based on pre-market trading on Thursday.
Tepid reaction
Analyst Laura Hoy at Hargreaves Lansdown said this was “a tepid reception” amid a focus that was on a decline in automotive margins, which fell from 32.9% in the first quarter to 27.9%.
“The more cars that rattle through Tesla’s enormous gigafactories the lower the per-unit costs, so the disappointing delivery numbers released earlier this month meant investors had already braced themselves for a step down in profitability," she said.
“On the bright side, this should be a short-term problem. As we saw in the first quarter, fully functioning factories send dollars straight to the bottom line. Once supply chain bottle necks ease and the factories are humming along at full capacity, margins will get a boost.”
Dan Ives at broker Wedbush said that while the automotive margin missed the Street forecast by 200 basis points this number was “better than the lowered whisper numbers, which along with relatively impressive bottom-line metrics were something for the bulls to hang their hat on in an otherwise very choppy quarter given the China shutdowns”.
No change to full-year deliveries was “a very important headline for investors”, Ives added, with Tesla now on a run-rate to produce 40k cars per week, meaning it would be heading into 2023 on an annual production run-rate of 2mln.
However, the analyst admitted the “elephant in the room for the stock will be the Everest-like uphill climb for deliveries” needed in the second half of the year to hit the 1.4mln units that this guidance implies.
with many on the Street being skeptical about this number IF any Covid shutdown comes back to China the rest of the year. The Austin and Berlin factory ramps are proceeding well, but really do not become major factors until 2023 with all the production pressure on the shoulders of Fremont and Shanghai.
“Margins during this ramp and the Berlin/Austin build-outs will be under some near-term pressure and should bounce back to normalized levels in 2023 with the Street laser focused on this dynamic.”
Could Shanghai shut down again? Of course it can with zero Covid issues the wild card and the Street understands the risk. Strong Demand a focus and 40k weekly production ramp along with 4680 news front and center. These are the debatable points for bulls/bears on name this am
— Dan Ives (@DivesTech) July 21, 2022