Tesla Q2 Results: Profitability Slightly Below Expectations, Q3 Guidance Is Conservative

On July 20, Tesla released its second-quarter financial report. Tesla’s total revenue in the second quarter was US$24.927 billion, a year-on-year increase of 47%; gross profit was US$4.533 billion, a year-on-year increase of 7%; gross profit margin was 18.2%, lower than the 19.3% in the first quarter and 25% in the same period last year. %. Operating profit fell 3% year-on-year to US$2.399 billion; operating profit margin was 9.6%, lower than 11.4% in the first quarter and 14.6% in the same period last year; GAAP net profit attributable to ordinary shareholders was US$2.703 billion, a year-on-year increase of 20%; Earnings per share attributable to ordinary shareholders was US$0.78, a year-on-year increase of 20%.

After the earnings, Tesla shares fell about 4% after hours. We believe that Tesla’s profitability in the second quarter is slightly lower than expected, and the guidance for Q3 is conservative; Musk expects a certain quarter-on-quarter decline in production in the third quarter, and also hints that there is a possibility of price cuts in the second half of the year, and the stock price may decline in the short term.

Tesla’s gross margin in the second quarter was 18.2%, below market expectations of 18.8%. In the first quarter, Tesla’s gross profit margin was 19.3%, down from 24% in the fourth quarter; the operating profit margin fell below 10% in the second quarter to 9.6%, nearly 5% lower than a year ago.

Tesla's management believes that the quarter-on-quarter decline in the operating profit margin in the second quarter was mainly due to:

- Car sales mix and car price cuts reduce ASP

- 4680 battery production costs and other related expenses

-Cybertruck, AI and other large-scale projects drive operating expenses to increase

- Negative foreign exchange impact

The main reason for the decline in profit margins was Tesla's price cuts in April and June.

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. Musk has also repeatedly talked about the opportunities brought by fully automatic driving, Tesla robots and Dojo supercomputers to Tesla. Tesla also "naturally" It has become a so-called "AI concept stock".

Investor enthusiasm was further fueled by Musk tweeting on June 5 that Tesla was open to licensing Autopilot, full self-driving and electric vehicle technologies to other automakers.

Musk mentioned that before the end of 2024, he will invest another US$1 billion in the Dojo supercomputer; combined with the stock price, considering that Tesla’s increase in the past few months is too large, and Tesla’s layout in the AI business (FSD, Tesla, etc.) Pull robots and Dojo supercomputers) will be difficult to reflect on the financial report in a few years. The data in Tesla's financial report may remind investors to refocus on Tesla's fundamentals: Tesla is still an automaker, and its AI business can't even be reflected in the income statement.

We believe that the company's Q3 production cut will have limited impact on the company. Production "will be slightly lower" in the third quarter as Tesla undertakes factory upgrades, Musk said. Tesla produced more than it sold in the fifth quarter, meaning inventories are building up. In the past five quarters, the difference between the company's production and sales was 3,885, 22,093, 34,423, 17,933 and 13,560 respectively. Based on the difference between production and sales, the cumulative inventory reached 91,894. Considering the inventory , we believe that the small production cut in Q3 will have limited impact on Tesla.

Musk mentioned that as loan interest rates rise, many consumers will be more hesitant to take out loans, because this also means that car prices will increase in disguise. If loan interest rates continue to rise, Tesla will choose to cut prices to allow more consumers can afford it. At present, Tesla's gross profit margin still has the risk of continuing to decline in the short term.

According to Wind data, 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 ternary battery increases by 5,363 yuan. We believe that there is a high probability that lithium mines will fall below 100,000 yuan in the future, and Tesla's single-car cost is expected to drop by $1,150.

Without a price increase, Tesla's gross profit margin will hardly return to last year's level. If the lithium mine in Q3 falls below 100,000 yuan, we estimate that the gross profit margin will be 24.5%, 20.7%, and 16.5% respectively under the conditions of 5% price increase, no price cut, and 5% price reduction.

Tesla has disclosed data on car deliveries ahead of the earnings release, and the market's focus has shifted to profitability. Since the gross profit margin and operating profit margin of Tesla's Q2 financial report were lower than expected, after the financial report was released, Tesla's stock price fell by about 4% after hours.

From a valuation perspective, Tesla’s current PE (TTM) is 75.7 times, almost double the valuation at the beginning of the year. A large part of Tesla's current valuation comes from the AI business that has not yet landed.

Musk mentioned that more than US$1 billion will be invested in the Dojo supercomputer before the end of 2024; combined with the stock price, considering that Tesla has increased too much in the past few months, and Tesla's layout in the AI ​​business (FSD, Tesla, etc.) Pull robots and Dojo supercomputers) will be difficult to reflect on the financial report in a few years. The data in Tesla's financial report may remind investors to refocus on Tesla's fundamentals: Tesla is still an automaker, and its AI business can't even be reflected in the income statement.

Affected by the macroeconomic environment and high overseas loan interest rates, Tesla's gross profit margin has been under pressure for two consecutive quarters. The follow-up Tesla's profitability mainly focuses on:

1) Follow-up trends in the macro environment and interest rates, and whether Tesla will continue to cut prices in the future.

2) The price of lithium carbonate in Q3 is likely to fall, which is expected to drive the restoration of Tesla's gross profit margin.

Due to the high focus on Tesla, the company's stock price is highly dependent on event-driven in the short term, including: whether to cut prices in the short term, the progress of FSD, the progress of Cybertruck's production capacity ramp-up, and so on. In the absence of an event-driven situation, the stock trend will be heavily inclined to monthly sales data, and every time the monthly data exceeds/below expectations, there will be short-term trading opportunities.

In terms of strategy, the current Tesla stock price has a certain downside risk, and it is recommended to adopt a more conservative investment strategy such as Covered Call.