Tesla 24Q2 Earnings Preview: Gross margin is expected to be better than expected, but with high pressure on valuation

According to Bloomberg's consensus estimates, Tesla's Q2 is expected to have:

   Revenue of $24.564 billion, a year-over-year decrease of 1.46% and a quarter-over-quarter increase of 15.32%;

   Adjusted net profit of $2.135 billion, a year-over-year decrease of 21.01% and a quarter-over-quarter increase of 39.02%;

   Diluted adjusted earnings per share of $0.60, a year-over-year decrease of 34% and a quarter-over-quarter increase of 33%.

Overall, while Tesla's performance shows a quarter-over-quarter improvement, it still declines year-over-year. Here is a detailed analysis of each element.

Tesla's business structure is mainly divided into three segments: Automotive, Energy, and Services & Other.

   Automotive includes revenue from electric vehicle sales, leasing, and regulatory credits.

 Energy covers comprehensive solutions from solar power generation, energy storage to EV charging. Revenue comes from sales, leasing, and related services.

   Services & Other includes non-warranty after-sales services, paid charging services, and used car sales.

As of 2023, electric vehicle sales and related automotive services account for over 93% of revenue. Electric vehicle sales remain the core business.

   Q2 production: 410,813 vehicles, down 5.2% quarter-over-quarter, down 14.3% year-over-year.

   Q2 deliveries: 443,956 vehicles, up 14.7% quarter-over-quarter, down 4.7% year-over-year.

While Q2 delivery trends slightly improved from Q1 and exceeded the market's general expectation of 439,302 vehicles, overall performance remains weak and concerning, especially given Tesla's high valuation. The market had previously lowered expectations significantly, allowing Tesla to exceed expectations with a lower delivery volume.

In reality, Tesla's vehicle deliveries have declined year-over-year for two consecutive quarters. According to JPMorgan, the global battery electric vehicle (BEV) market grew by about 22% year-over-year in Q2, while the global internal combustion engine vehicle market remained flat, indicating Tesla's significant loss in market share.

Q2 saw a reduction in inventory levels, benefiting free cash flow growth. In the Q2 of 2024, Tesla delivered more than it produced, partially reversing the previous record of 47,000 vehicles produced in excess of deliveries in the first quarter. Specifically, Tesla delivered 33,000 more vehicles than it produced in the second quarter, and its days of supply inventory decreased by seven days. That means Tesla will be able to work through the inventory it accumulated in the first quarter, a change that may have had a positive impact on Tesla's stock price and favor free cash flow growth.

But overall, the level of inventory currently held by companies remains high, and in fact the inventory at the end of the second quarter was the second highest after the first quarter, which could weigh on pricing and profits for some time to come.

The outlook for the EV business remains uncertain. Regional challenges remain in Europe and China, while the situation in the United States is improving.

Weak Demand in Europe. Countries like Germany and France reduce subsidies for non-EU produced EVs, negatively impacting Tesla's sales in the region.

Sales in China are expected to rise, driven by preferential policies, but the market share is not optimistic. China's new energy vehicles grew 37 percent and 40 percent in April and May, respectively, from a year earlier, mainly due to the price war strategy implemented by major brands and increased government subsidies. Tesla has also launched a number of promotional activities in China, Tesla announced on July 1, Chinese mainland users to buy the new Model S/X two models of current cars, can enjoy a discount of 35,000 to 45,000 yuan. It also announced the latest 5-year zero interest policy, which is the third time that Tesla China has issued a phased interest free policy within the year. Compared with the previous two, the policy intensity and scope are higher. Therefore, Tesla's sales in this market are expected to increase. However, due to its more competitive landscape, Tesla's market share in China is still expected to decline.

The US market is expected to benefit from the rate cut in the second half of the year. In the first quarter, the demand for electric vehicles in the US market slowed sharply due to high interest rates, and at the company level, Tesla's first-quarter delivery was not optimistic due to factory production problems, while the sales of electric vehicles in the US in the second quarter were better than expected, and gradually returned to normal production and delivery levels.

At the same time, in order to stimulate demand, it cut the U.S. price of Model Y, Model X and Model S by $2,000 each in April, and lowered the interest rate on Model Y purchases to 0.99% in May, the lowest rate in its history. In the future, with the Federal Reserve interest rate cut is imminent, the demand for electric vehicles bottomed out, and new cars are expected to be released from the end of the year to next year, and demand is expected to develop in a positive direction.

These promotional and discount activities may increase delivery volumes, but the costs of promotions and the ongoing price war will put tremendous pressure on Q2 profit margins and earnings per share.

In Q2 2024, Tesla made significant progress in energy storage products, deploying 9.4 GWh of energy storage products, a quarter-over-quarter increase of over 129% and a year-over-year increase of 154%, setting a record for quarterly deployment volume.

In fact, this deployment scale is more than twice that of the previous quarter. According to Tesla's last quarter financial report, the gross profit margin of the energy storage business is 25%, much higher than the 16% gross profit margin of the automotive business. Additionally, due to economies of scale, the gross profit margin of the energy storage business is growing rapidly. The Q1 financial report shows that although the revenue from the energy storage business increased by only 7%, the gross profit grew by 140%. This indicates that the energy storage business not only has a large market scale but also higher profitability potential.

If this growth can be effectively converted into sales, it will significantly enhance Tesla's total revenue and net profit. Despite concerns about profit margins due to extensive price cuts at the end of the quarter, a simple calculation reveals that if the revenue from this energy storage business is proportionally scaled up, its revenue will reach $3.5 billion. At a 25% gross profit margin, this would bring Tesla $880 million in gross profit. This accounts for a significant portion of Tesla's total gross profit of $3.7 billion last quarter, nearly 24%.

The explosion in the energy storage business not only validates market expectations of its potential but also provides Tesla with certainty for future growth. Wall Street no longer needs to overly worry about the realization of autonomous driving technology or the revival of EV demand, as the vast space in the energy storage market can provide strong performance support and enhance the company's overall profit margins.

According to Bloomberg forecasts, Tesla's Q2 energy sector revenue is expected to grow by 50.21% year-over-year to $2.342 billion, driven by continuous demand for its Powerwall and Megapack energy storage products. The energy storage business is expected to exceed Bloomberg's consensus expectations.

Although the company postponed the Robotaxi unveiling event originally scheduled for August by two months to October, the delay is mainly to give the design team more time to redesign certain parts of the vehicle and increase production quantities.

However, this delay has little impact on Tesla's earnings and valuation. Wall Street has always been cautious about autonomous driving technology, focusing more on whether Tesla can launch more competitive models. Robotaxi revenue is not expected to materialize until 2027. A two-month delay does not significantly affect Tesla's overall trading logic. The market is more interested in Tesla launching more attractive products in the EV sector to meet consumer demand and drive company performance growth.

Overall, the factors affecting Tesla's Q2 gross margin remain complex:

Although there is a year-over-year decline and weak performance compared to recent history, Q2 delivery volumes will improve over Q1, helping reduce fixed costs per unit product.

Greater quarter-over-quarter gains are expected in Q2, with Tesla possibly gaining extra bargaining power with suppliers during the EV market slowdown.

3. Pricing: The negative impact of pricing in Q2 will be relatively reduced compared to earlier pressure.

The Cybertruck had a $400 million negative impact on pre-tax profits in Q1, but this pressure seems to have eased as production ramped up. March sales of the Cybertruck approached 1,200 units, twice that of competitor Rivian R1T, showing market acceptance. Additionally, Tesla announced the launch of the economical EV Model 2, expected to be officially sold in 2025, boosting market sentiment.

However, a recent recall due to Cybertruck accelerator pedal issues has added manufacturing complexity, increasing the production volume needed to break even.

5. FSD (Full Self-Driving): Since the launch of FSD version 12 this year, Tesla's data accumulation has grown exponentially. Q2 automotive gross margins are expected to continue benefiting from the confirmation of FSD.

6. Strong energy storage business is expected to contribute to overall gross margin growth.

According to Bloomberg consensus estimates, Tesla's gross margin for this quarter is expected to remain flat quarter-over-quarter; operating margin is projected at 7.66%, down 3.75 percentage points year-over-year; adjusted earnings per share (EPS) is forecasted at $0.60, down 34% year-over-year.

In summary, despite a decline in revenue due to reduced vehicle deliveries, improvements in quarter-over-quarter sales, growth in the energy business, and increased Cybertruck sales are expected to positively impact Tesla's Q2 gross margin, likely exceeding expectations and showing quarter-over-quarter improvement. Adjusted EPS might slightly surpass expectations.

Additionally, since the production and delivery data has already been released, the market has absorbed this information. Thus, even though Tesla's quarterly performance is expected to be weak, the company's disclosure of future developments and Robotaxi information during the earnings call might shift investor attention from core business performance to long-term growth opportunities, potentially having a positive impact on the stock price. Following the Q1 earnings release, despite poor automotive sales performance, investor optimism about the Robotaxi unveiling and affordable vehicle news overshadowed this, driving the stock price up.

However, it is important to note that Tesla's current valuation is significantly higher than its peers. Compared to actual performance, the recent stock price increase is more event-driven, factoring in AI valuation expectations, with a 2024 forward PE ratio already reaching 100 times. The current stock price has risen to $248, whereas at the beginning of last year, with a delivery forecast of 569K, the stock price was only $108.1. In comparison, Tesla's current sales and profit margins are lower, but the stock price is higher, and trading sentiment is more optimistic.

Investors should be aware of the high valuation risk, and given the high uncertainty of this quarter's US earnings season, the stock price performance post-earnings release has been relatively muted unless there is significant outperformance or guidance. For Tesla's current stock price, the upside potential is limited. Investors holding the stock may consider selling a certain number of call options to lock in some gains and earn premiums.