Tesla's earning preview: EV delivery beats expectations, margin may continue to be under pressure

Recently, Tesla announced the delivery data for the second quarter. In the second quarter, Tesla delivered a total of 466,100 vehicles, an increase of 10.2% from the previous quarter. This figure was 4.7% higher than the market expectation of 445,000 vehicles. We believe that Tesla's sales exceeded expectations due to its price cuts policies in North America.

Tesla's second-quarter financial report will be announced on July 19. How much Tesla's price cuts will have on gross profit margins and operating profit margins will be known at that time.

Tesla's revenue is mainly divided into the automotive segment and the energy storage segment. The automotive business is divided into four revenue sub-sections: car sales, car leasing, service and other revenue, and automotive regulatory credits.

1) Auto sector

Automotive sales revenue includes revenue related to cash delivery of Model S, Model X, Model 3 and Model Y vehicles, including access to the Supercharger network, Internet connectivity, FSD features and over-the-air technology updates.

Automotive lease revenue includes the amortization of revenue from vehicles under direct operating lease agreements accounted for in accordance with lease accounting principles, as well as the amortization of revenue from vehicles sold under operating leases with guaranteed resale value.

Service and other revenues include non-warranty aftermarket vehicle services, used vehicle sales, retail merchandise, sales of acquired subsidiaries to third-party customers, and vehicle insurance revenues.

Auto regulatory credit revenues refers to the income from selling auto regulatory credit .

2) Energy storage sector

Energy generation and storage revenue refers to revenue earned through the sale and lease of solar power generation and energy storage equipment, as well as the provision of related services and incentives for the sale of solar systems.

In the second quarter, Tesla delivered a total of 466,100 vehicles, an increase of 10.2% from the previous quarter. This figure was 4.7% higher than the market expectation of 445,000 vehicles. We believe that Tesla’s sales exceeded expectations due to its price cuts in North America, including: price cuts in America in April, users of the full range of Model 3 models can enjoy a full subsidy of US$7,500, and free charging

Tesla is expected to hit its annual sales target of 2 million vehicles. In the first half of this year, Tesla delivered a total of 889,000 vehicles, accounting for 49.4% of the annual guidance lower limit of 1.8 million vehicles and 44.5% of the upper limit of 2 million vehicles. With reference to the delivery volume in the first half of last year accounting for 43.0% of the whole year, it is expected to challenge 2 million vehicles for the whole year.

With the announcement of Q2 sales, the focus of the market has shifted to the company's Q2 gross profit margin. Tesla's gross profit margin in the first quarter was only 19.3%, falling below the red line of 20%, and a quarter-on-quarter decrease of 6.3%, which significantly affected market sentiment. According to Bloomberg, the market generally expects Tesla's Q2 gross profit margin to be 18.7%, down 0.6% from the previous quarter, mainly due to Tesla's price reduction and profit sharing strategy in the United States.

Elon said in the earnings call in the first quarter that the company will prioritize sales growth over profit margins, and expects Tesla to generate considerable profits through autonomous driving in the future.

It is expected that Tesla's revenue and costs will decrease in the second quarter. In terms of price, in order to meet the sales target, Tesla has cut prices in North America in April and June, and it is expected that the sales price of Q2 bicycles will be further reduced. In terms of cost, Wind data shows that the average price of battery-grade lithium carbonate in the second quarter was 254,600 yuan, a quarter-on-quarter decrease of 36.79%. According to estimates, the price of lithium increases by 100,000 yuan per ton, and the cost of a vehicle equipped with a MCN battery increases by 5,363 yuan. The drop in lithium prices in the second quarter corresponds to a drop in the cost of a EV of 8,000 yuan.

The strong performance of the company's stock price since May is mainly due to investors' pursuit of the concept of AI. Tesla has been laying out in the field of artificial intelligence and technology. Elon has also repeatedly talked about the opportunities brought to Tesla by fully automatic driving, Tesla robots and Dojo supercomputers. Tesla has also become a so-called "AI stocks".

Investor enthusiasm was further fueled by Elon's June 5 tweet that Tesla was open to licensing Autopilot, full self-driving and electric vehicle technologies to other automakers.

Although the AI business contributes nearly half of Tesla's market capitalization, only the Full Self-Driving (FSD) business currently contributes a small amount of revenue.

Tesla’s financial report shows that the deferred revenue is related to the use of the Supercharger network, Internet connectivity, self-driving functions and over-the-air technology updates. Therefore, the changes in deferred revenue can be tracked to track the order status of fully automatic driving (FSD).

We predict that the gross profit margin of the company's auto business in Q2 will be 18.5%, down 0.5% quarter-on-quarter; the EPS in Q2 is likely to fall in the range of 0.78-0.88 (the EPS in Q1 is 0.8), which is roughly the same as Bloomberg's consensus forecast of 0.82. We predict that although the sales volume in Q2 achieved a 10% growth month-on-month, Tesla's price reduction strategy will further put pressure on its gross profit margin, and the final EPS is expected to be roughly the same as that in Q1.

Share price review:

Tesla's stock price has performed strongly recently. From the beginning of May to the end of June 2023, Tesla stock rose 59.3%, while the S&P 500 rose only 6.7% during the same period. Its rise is mainly attributable to:

1) The fundamentals of the company have improved, and the Q2 delivery volume has exceeded expectations

2) Driven by a series of events (such as the cooperation between General Motors, Ford Motor and Tesla, the progress of fully automatic driving technology, Elon Musk's visit to China, and participation in artificial intelligence conferences)

3) The macro environment in which top technology stocks in the U.S. stock market significantly outperformed the broader market (the top 7 technology stocks in the U.S. stock market in the first half of the year greatly exceeded the S&P 500 index)

Strategy recommendation:

It is expected that Tesla's financial report performance will be flat with the market's consensus expectations. Combined with the stock price, considering that Tesla's rally in the past few months, and Tesla's layout in the AI ​​business (FSD, Tesla robot and Dojo Supercomputer) is difficult to reflect in the financial report within a few years. At that time, the data of Tesla's financial report may remind investors to re-focus on Tesla's fundamentals: Tesla is still a car manufacturer, and its AI business cannot even be reflected in the income statement.

In terms of strategy, considering that Tesla and Musk have a large number of believers, it is recommended to adopt a more stable investment strategy such as Covered Call.