The Zhitong Finance App learned that Tesla (TSLA.US) announced financial results for the second quarter. Tesla's profitability shrank in the second quarter, showing that the months-long price cuts it implemented to incentivize budget-conscious consumers have had an impact. Q2 gross margin was 18.2%, slightly lower than Wall Street's forecast of 18.8%, far lower than 25% in the same period last year, and 19.3% lower than the previous quarter's 19.3%. Q2 revenue increased 47% year over year to $24.9 billion, higher than analysts' expectations of $24.5 billion.

Lower ASP due to mix and pricing has dragged down profit margins. Other factors affecting profitability include production costs for 4,680 batteries, increased operating expenses driven by Cybertruck, AI, and other large-scale projects, and negative foreign exchange impacts. Excluding some projects, Tesla's second-quarter earnings per share were 91 cents, higher than analysts' expectations of 81 cents. Net profit for the second quarter was $2.7 billion, up 20% year over year, but revenue fell 3% year over year to $2.4 billion, and operating margin fell to 9.6%, a new low of at least five quarters, partly due to incentives and discounts.

Car business

Regarding the price reduction of cars, Tesla CEO Musk once said that he is willing to sacrifice profitability in exchange for sales volume, and that this strategy is clearly effective. The company's profits and revenue over this period have both exceeded expectations, and it has already announced record car deliveries. The company also said the days ahead will be better: Tesla is investing a lot of money to increase battery production, launch a new Cybertruck (Cybertruck), and other large-scale, growth-oriented projects.

Musk said, “It really makes sense to sacrifice profit margins to produce more cars because we think their valuations will rise dramatically in the near future.”

The company did not announce the gross profit margin of its cars. This is a closely watched measure of Tesla's profitability. At the beginning of last year, the gross margin of automobiles exceeded 30%. However, according to calculations, automobile gross margin excluding regulatory credit fell from 19% in the first quarter to 18.1% in the second quarter, compared to 26% in the same period last year, and analysts' expectations were 19.2%.

Dan Ives (Dan Ives), an analyst at Wedbush Securities, pointed out that the “most important” auto industry's gross margin after deduction of credit was 18.1%, higher than its 18.0% expectation. Ives and his team believe that after the price cut, Tesla saw stable demand in the US and China, that profit margins are currently stable, and that they should bottom out in the next one to two quarters.

In January of this year, Tesla's chief financial officer Zachary Kirkhorn (Zachary Kirkhorn) stated that his goal is to have a car profit margin of 20% this year (excluding regulatory credit). With demand for electric vehicle purchases generally slowing and inventories continuing to expand, this forecast is difficult to maintain. Kirkhorn lowered this forecast in April.

CFRA analyst Garrett Nelson (Garrett Nelson) is more cautious. He pointed out that before the data was released, investors' expectations were clearly very high. Nelson said that Tesla's shrinking gross margin is still a major problem, and said that the fundamentals of electric vehicles in the US have become more unstable. The average transaction price of electric vehicles in the US fell 20% year on year in June, and inventory was the supply for 103 days.

Investors, however, reacted negatively to weak profit margins. Furthermore, Musk said production “will drop slightly” this quarter due to Tesla's factory upgrades. As of press release, Tesla's stock price fell 5.20% after-hours to $276.11.

One of the challenges facing the automaker is its growing vehicle inventory. The company said that global inventory can currently be used for 16 days, up from 15 days in the previous quarter and 4 days in the same period last year. This is the situation after months of price cuts — some of Tesla's best-selling models dropped by as much as 30% during this period, and the car manufacturer also offered discounts such as free charging.

Tesla delivered 466.14 million electric vehicles and produced 479,700 vehicles in the second quarter. In the second quarter of last year, Tesla delivered 25.5 cars, and in the first quarter of this year, it delivered 423,000 cars. Musk said that despite the slowdown in production in the third quarter due to the “summer shutdown,” the company is still expected to achieve a year-on-year increase of about 50% in production in 2023, reaching about 1.8 million vehicles, with market expectations of 1.9 million units. Earlier this year, Musk said Tesla “has an opportunity” to produce 2 million cars.

Analysts say new models such as Cybertruck (Cybertruck) can help Tesla maintain its extraordinary sales growth rate. However, the long-awaited truck may not be sold in large numbers until next year. Tesla said over the weekend that the first Cyber truck just recently went off line at its Austin plant. Tesla claims that the Cyber truck currently under construction is two years late; in fact, it is a “candidate product release” and is not for sale. The company didn't provide any information on pricing, but said the first Cybertruck might be available later this year.

Other business

Musk also touted the company's work on driver assistance software, which Tesla said would like to license to other car manufacturers. However, most investors expect driverless cars to take years to drive safely. As more vehicles hit the road, Tesla's “service and other” revenue (including out-of-warranty vehicle maintenance costs) increased 47% to $2.15 billion.

Second, the scale of solar energy deployment fell 38% year over year to 6g MW. The scale of energy storage deployment increased 222% year-on-year to 3653 Mwh. Its energy production and storage revenue from solar installations and backup batteries increased 74% year over year to $1.51 billion.

Tesla's R&D costs rose to $943 million from $771 million in the first quarter. The company wrote in shareholder documents that it focuses on “being at the forefront of artificial intelligence development” and has begun producing its Dojo “training computer.” Musk also said that Tesla will invest more than 1 billion US dollars in Dojo next year. Dojo is a supercomputer developed by Tesla for artificial intelligence machine learning and computer vision training purposes. Tesla collects video footage and data from customer and company vehicles to improve existing software and develop new features as part of driver assistance systems.

Tesla said the company is focusing on reducing costs, developing new products that contribute to future growth, increasing R&D investment, providing better auto financing options, continuously improving products, and generating free cash flow. By the end of the quarter, Tesla's cash position was $23.1 billion (up 22% year over year), its free cash flow was $1.01 billion (up 62% year over year), and market expectations were $2.18 billion.