Tesla: Excellent Q2 Results, Remains A Top Pick

Tesla, Inc. (NASDAQ:TSLA) reported better-than-expected earnings on Wednesday, delivering nearly $25 billion in revenues (47% YoY surge). Moreover, Tesla beat consensus EPS projections by about 10%, with EPS and revenues materializing toward the higher end of the estimate range. Nevertheless, despite the better-than-anticipated earnings results, Tesla’s stock dropped by about 4% after hours and may continue moving lower in the coming days.

Some market participants “sold the news” in Tesla, which should lead to a long-term buying opportunity in its stock. Tesla’s recent price cuts enabled it to increase sales, consolidate market share, and solidify its dominant, market-leading position in the ultra-competitive EV space. Furthermore, price cuts will only last for a while, and Tesla’s sales could increase more than expected as we advance.

Additionally, despite introducing lower prices, Tesla posted a healthy gross margin, and its profitability could increase more than anticipated as the transitory slowdown phase concludes and the economy returns to growth. Tesla has enormous growth and profitability potential, and its stock price should move considerably higher in the coming years, making it a top buy-and-hold candidate long term.

Technically, We Could See A Pullback

Technically, we could see a pullback, and that’s a good thing. Tesla’s stock has been red hot since hitting a bottom around $100 early this year. Tesla’s stock has tripled in about a six-month time frame. Also, shares got massively overbought in mid-June, as the RSI skyrocketed to 90. Therefore, we could see a pullback to about the $250-200 range, creating an excellent long-term buying opportunity if it occurs.

Despite the overextended (near-term) technical conditions, Tesla’s technical image remains bullish long-term. The 50-day MA recently crossed above the 200-day MA, signaling improving long-term momentum for Tesla’s stock. In addition, technical indicators like the CCI, full stochastic, and others imply that Tesla’s stock has substantially more upside potential.

The Tesla Advantage

Before we get into the recent earnings, I want to discuss the “Tesla advantage.” While Tesla may have numerous competitive advantages, it recently illustrated a remarkable ability to lower prices on its vehicles. This strategy led to improved sales, significant revenue growth, and increased market share during the downturn. Due to Tesla’s exceptionally high profitability, the automaker temporarily decreased prices on its Model 3 and Model Y vehicles to less than $40,000 in some regions.

Implementing this strategy enabled Tesla to sell a record number of vehicles last quarter, and the constructive sales trend should persist as we advance. The ability to lower prices in a challenging time is an enormous advantage for Tesla, as most of its pure EV counterparts like Lucid (LCID), Rivian (RIVN), NIO Inc. (NIO), and others are unprofitable, and some haven’t illustrated the ability to mass produce cars yet.

Therefore, these newer companies cannot afford to have a price war with Tesla, and lower prices may be detrimental to their business. Thus, Tesla continues increasing sales while the more minor players continue showing limited success in this challenging time.

Furthermore, traditional automakers with compelling EV lineups typically have much lower margins than Tesla. Therefore, dropping prices to better compete with Tesla could result in margin erosion and substantial damage to the traditional automakers’ bottom lines.

Thus, we see the Tesla advantage, as it successfully decreases car prices while remaining highly profitable due to its significant revenue growth and high-margin manufacturing ability. Moreover, Tesla can raise prices in the future without damaging demand as the transitory slowdown passes and the global economy returns to growth in the coming years.

Recent Earnings – Better Than Expected

Tesla recently reported non-GAAP EPS of 91 cents (in line with my 90-cent – $1 estimate range). Also, Tesla reported revenues of $24.93 billion, about $200 million above the consensus estimate and roughly a 47% YoY gain. This revenue result was lower than my Q2 estimate, primarily due to fewer regulatory credit revenues and a lower-than-anticipated ASP for Tesla vehicles.

• While we saw the ASP for the Model 3/Y around $47-48K in recent years/quarters, Tesla’s price cuts could have brought the ASP down to about $43,500 in Q2.
• Q2 – 424,569 Model 3/Y vehicles (not subject to lease accounting) times $43,500 ASP could have resulted in around $18.5B in sales.
• Additionally, Tesla’s Model S/X segment ASP may be around $110K instead of the $120K ASP used in my recent Q2 estimates.
• 17,687 Model S/X vehicles (adjusted for lease accounting) at an ASP of about $110,000 could have provided around $1.9B in revenues in the second quarter.
• This updated data brings us to Tesla’s Q2 automotive sales figure of about $20.4 billion.
• Also, Tesla only utilized $282 million in regulatory credits. This number is on the lower end of the spectrum, and we could see more ($1-1.2B) in regulatory credit revenues in the year’s second half.
• We could also see the ASP for Model 3/Y vehicles move higher, to around $47,000, and $115K for the Model S/X segment in the second half.

Tesla: Q2 Financial Summary

We see exceptional growth, 47% YoY revenues (with the price cuts). Tesla’s deliveries increased by 83% YoY last quarter (Model 3/Y production increased by 90%), while automotive sales climbed by 46%. Therefore, automotive revenues should increase considerably as ASPs stabilize and proceed higher as the transitory slowdown phase ends soon.

Also, Tesla’s energy generation and storage business revenue has skyrocketed recently, surging by 74% YoY to more than $1.5B last quarter. We could continue seeing significant growth in Tesla’s EG&S segment in future quarters, and the business segments should become increasingly profitable as we move on.

Additionally, we could be looking at around rock bottom margins for Tesla here. Tesla has lowered prices aggressively, resulting in lower margins in recent quarters. Due to the significant price drops, Tesla’s gross margin shrunk to 18.2% last quarter, substantially lower than the 25% gross margin we saw in the same quarter one year ago.

As the recovery progresses, we should see Tesla’s gross margin climb back above 20%, potentially stabilizing in the 23-25% range in future years. The increased profitability should contribute substantially to the bottom line, boosting Tesla’s net income and EPS more than anticipated in the coming years. Also, it’s worth mentioning that Tesla’s net income margin was around 10.8% in Q2, substantially higher than traditional automakers.

Net Income Margins in the Industry

• Ford (F): 1.75% (typically 0-5%)
• Toyota (TM): 6.6% (usually 5-10%)
• General Motors (GM): 5% (typically 4-7%)
• Honda (HMC): 4% (typically 3-5%)
• Tesla: 10.8% (usually 13-15%).

A year ago, Tesla posted a net income margin of about 14%. Still, due to the challenging economic atmosphere and the subsequent price decreases, Tesla’s Net income margin came in close to 11% last quarter. On the other hand, many traditional automakers are barely making a profit in this environment, and even the highly profitable Toyota corporation’s profitability margin is substantially lower than Tesla’s. We should see Tesla’s income margin improve substantially as prices and the economy recover, likely moving up toward 15% or higher in future years.

Tesla’s Stock Could Go Much Higher Long Term

Click to enlarge

Source: The Financial Prophet.

Risks to Tesla Exist

Despite my bullish outlook, Tesla faces several risks. Tesla could encounter demand issues as its vehicles continue reaching higher degrees of penetration in the market. Furthermore, Tesla’s competition continues to increase as more pure EVs come to market, including many from traditional automakers.

Due to these and other risks, Tesla’s revenues may expand slower than anticipated, and its profitability may be lower than my projections indicate in future years. Tesla’s growth may slow more than expected, and the multiple on the stock could contract, causing its share price to appreciate slower or decline in a worst-case scenario as we advance. Investors should carefully examine these and other risks before investing in Tesla’s shares.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.