According to the Futu Securities app, China Merchants Securities has released a research report stating that Tesla's (TSLA.US) Q2 2024 profits were below expectations, including $0.62 billion in restructuring fees and expected layoffs, which were a one-time occurrence. The impact of layoffs may have been underestimated by the market. Excluding the impact of credits, revenue was slightly higher than expected, while gross profit margin was lower than expected, with automotive sales gross margin of 13.9%, lower than previous concerns. A gross profit margin of less than 14% could limit Tesla's ability to further lower prices. It is recommended to follow the progress of FSD V12.5 and Robotaxi in the future.

Tesla released its Q2 2024 earnings, which fell short of market expectations. Non-GAAP net income was $1.81 billion, a decrease of 42.4%/18.0% YoY/QoQ, and the gross margin on automobiles remains under pressure.

Financials:

1) Revenue was $25.5 billion, an increase of 2.3%/19.7% YoY/QoQ, 3.9% higher than the market expectation of $24.54 billion. Automotive business revenue was $19.88 billion, a decrease of 6.5%/14.4% YoY/QoQ, while energy business revenue was $3.01 billion, an increase of 99.7%/84.3% YoY/QoQ, and credit income was $0.89 billion, an increase of 215.6%/101.4% YoY/QoQ, with considerable fluctuations.

2) Non-GAAP net income was $1.81 billion, a decrease of 42.4%/18.0% YoY/QoQ, 15.2% lower than the market expectation of $2.14 billion. GAAP net income was $1.49 billion, a decrease of 42.8%/30.6% YoY/QoQ.

3) Gross margin was 18.0%, a decrease of 0.2%/increase of 0.6% YoY/QoQ, 0.6% higher than the market expectation of 17.4%, due to credit and energy business. Automotive gross margin was 13.9%, a decrease of 3.7%/-1.7% YoY/QoQ, lower than expected, while energy business gross margin was 24.6%, an increase of 6.1%/-0.1% YoY/QoQ, as expected.

4) Unit revenue was $0.0417 million, a decrease of $815 QoQ; unit gross profit was $0.0058 million, a decrease of $842 QoQ; and non-GAAP net income per unit was $0.0041 million, an increase of $111 QoQ.

5) R&D expense ratio was 4.2%, an increase of 0.4%/decrease of 1.2% YoY/QoQ, while SG&A expense ratio was 5.0%, an increase of 0.2%/-1.4% YoY/QoQ.

6) Free cash flow was $1.34 billion, turning positive.

Delivery:

Q2 deliveries of 0.444 million units exceeded expectations, with a YoY/QoQ decrease/increase of 4.8%/14.8%. We expect there may have been an inventory-clearing factor.

Earnings conference highlights:

There were not many surprises. A low-priced model will be launched in H1 2025; Robotaxi will be launched on October 10; and the first generation of robotic products will be produced in small quantities in 2025 and marketed abroad in 2026. The Mexican factory is currently suspended.

Comment:

1) Profits were below expectations, including $0.62 billion in restructuring fees and expected layoffs, which were a one-time occurrence. The impact of layoffs may have been underestimated by the market.

2) Excluding the impact of credits, revenue was slightly higher than expected, while gross profit margin was lower than expected, with automotive sales gross margin of 13.9%, lower than our previous concerns. A gross profit margin of less than 14% could limit Tesla's ability to further lower prices.

3) It is recommended to follow the progress of FSD V12.5 and Robotaxi in the future.

In conclusion:

1) We observed that market expectations may have been too high, and we pointed out risks in forward-looking reports and roadshows.

2) Remarkably similar to previous events: On June 13, Musk's pay was approved and the stock price jumped; subsequently, the market (including us) expected surprises at the shareholders' meeting, but the results were disappointing; on July 2, Q2 deliveries exceeded expectations, and once again the market had high expectations for the earnings conference, but they were disappointed again. Musk's pace is not easily swayed by external forces, while market expectations fluctuate greatly.

It is believed that the stock price will continue to experience short-term downward oscillations, but the downside is not expected to be too large (market cap of 8-7 billion US dollars). Currently, it has fallen 7.7% after hours.

Risk warning: Declining profitability; Deterioration of competitive landscape; Delay in delivery of Cybertruck.