The Silence of the Bears: Tesla Q2 Earnings Results Bolster the Buy Case
It hasn’t been easy being a Tesla (NASDAQ:TSLA) bull lately. The bears are everywhere. And they’re getting bigger. Lately, their diet consists of tasty headlines that detail recent consumer backlash in China, recalls in China and the U.S. and delayed deliveries of the company’s high-performance version of its flagship sedan, the Model S Plaid. Each of these has helped fuel the bearish case toward TSLA stock more recently.
Adding more meat to the bearish case is the fact that Tesla’s early dominance — and rich valuation — have set the stage for a No. 2 player in the EV industry to emerge.
While the “next Tesla” remains unidentified, one thing is clear: Whoever it is faces a hard slog to commercial production. Yet, despite an ongoing chip shortage affecting the entire automotive industry, EV upstarts continue to make noise about their ability to ramp quickly and seamlessly and confidently. (Lucid Motors (NASDAQ:LCID), I’m thinking about you).
But thankfully for Elon Musk, the proof is in the pudding. (Or, in this case, the Q2 numbers). He’s the man at the helm of the company that he claims is “scaling large manufactured objects at the fastest rate in history.” If there’s any single takeaway from Tesla’s earnings results yesterday it’s that reports of the company’s imminent demise are greatly exaggerated.
Despite all the noise and bad publicity, the EV giant delivered a top- and bottom-line beat on the heels of already impressive second-quarter vehicle deliveries and production numbers.
Numbers are always a good way to silence critics. But so is size. And that’s really where Tesla shines. After all, Tesla is a manufacturing story entering its next wave of growth.
In other words, Tesla is starting to see the benefits of scale.
With the company at a clear inflection point in the business model, now’s the time to buy TSLA stock. Here’s a closer look at Q2 results and why Tesla is still worth a look today.
Top and Bottom Line Beat Busts Regulatory Credit Myths
Bears really don’t have much to chew on this quarter. After all, Tesla’s Q2 numbers were well ahead of expectations. Earnings-per-share of $1.45 on $11.96 billion handily beat consensus of 96 cents on $11.5 billion. Tesla posted its seventh consecutive quarter of profitability. It also exceeded $1 billion in quarterly net income for the first time in its history.
Bears have perpetuated a false narrative that the company isn’t profitable without regulatory credits, which the company sells for cash to other automakers for producing more zero emission vehicles. Yet, once again, the EV giant still managed to eke out a profit — despite Q2 being the lowest number for credits over the past four quarters.
Breaking things down a bit further, automotive revenue was $10.21 billion. Only $354 million of this figure came from sales of regulatory credits (credits were $500 million in Q1). Gross margins came in at 28.4% (25% without regulatory credits), higher than any of the last four quarters. Tesla reported an impressive adjusted EBITDA margin of 17.7% (above 16.9% consensus). Furthermore, its operating margin is now an impressive 11%.
Despite supply chain instability and cost headwinds, Tesla’s gross margin continues to increase. The company is clearly benefiting from cost reductions and increases in production and delivery volumes. Yet competitors are entering volume production and slashing prices. That makes manufacturing scale Tesla’s biggest lever for expanding growth and profitability.
It’s also an important factor sustaining the company’s competitive advantage.
Chip Shortages Dent the Cybertruck and Energy Business
Energy revenues of $801 million were up 60% sequentially. This segment includes solar energy for homes and businesses and storage for utilities. Tesla doesn’t disclose how many energy storage units it sells each quarter. Musk, in recent court testimony, said that demand for Tesla’s Powerwall backup batteries is approximately 80,000. But, Tesla will only be able to produce 30,000 to 35,000 this quarter owing to chip shortages.
Tesla is pushing production of its Cybertruck electric pickup to late 2021, similarly blaming chip shortages. While investors shouldn’t be surprised, Musk also tempered expectations, noting that the manufacturing ramp will be much more difficult given there’s so much “unexplored territory” with a new design architecture.
Bitcoin Loss: Not a Bloodbath
Given crypto’s recent plunge, investors have been rightfully worried about the current value of Tesla’s $1.5 billion Bitcoin (CCC:BTC-USD) stake. The $23 million impairment charge is a clear reversal from the net gain of $101 million last quarter. But it was only a modest drag on income this quarter. The bigger question investors should ask is whether Tesla will accept the digital currency for vehicle purchases. Musk has waffled on his topic and didn’t give any incremental insight on the call.
Elon to Competitors: ‘You’ve Got to Eat a lot of Glass’
Tesla had already released its Q2 2021 numbers, confirming delivery of just over 200,000 cars and production of more than 206,000 vehicles between April and June 2021. As I had anticipated in my Q2 preview, Tesla’s 8% sequential improvement in deliveries set a new quarterly record. The better-than-expected sequential increase reflects strong sales of the Model 3 and Model Y, which offset weakness in Model S and Model X.
The main driver of TSLA stock is growth. That means Tesla must continue to make progress in adding production capacity and securing battery supply. Tesla’s Gigafactory Berlin and Gigafactory Texas should start producing vehicles by the end of the year. Tesla’s battery cell production is also critical. That’s because the company plans to use those cells in the EVs produced at the new plants.
Perhaps a veiled reference to Peter Rawlinson’s confidence on Lucid Motors’ recent investor call, Musk once again underscored the financial and technological pain associated with full scale auto manufacturing. Speaking on this challenge, he said “you’ve got to eat a lot of glass.” He also tempered investor expectations on the company’s initial production ramp at the new plants. Musk noted that these are new factories and new designs. He then reiterated the challenges of building an end-to-end supply chain and the frustration of only being able to move “as fast as your slowest supplier.”
The Bottom Line on TSLA Stock
Whether you’re a bull or bear on Tesla stock, there’s one thing we can agree on. Tesla’s numbers, which beat estimates by a healthy margin, confirm strong global demand for EVs continues. The strength of those numbers is also more than enough to offset Tesla’s primary near-term supply challenges.
Tesla shares have been gaining ground in recent months, but they’re still down 12% year-to-date. That marks significant underperformance relative to the S&P 500, which has gained 18% over the same period. For the most part, the recent weakness in TSLA stock is the result of headline risk. Much of the concern relates to increasing competition from mainstream automakers, who are also getting serious about their part in EV industry. For example, shares of Ford (NYSE:F) and General Motors (NYSE:GM) are up 60% and 34% year-to-date, respectively.
Tesla’s Q2 results should be enough to sustain the recent upward movement in TSLA stock. With competitive threats largely overblown, and the company well-positioned to capture a massive $5 trillion global automotive market, I remain a buyer of Tesla.
Your comments and feedback are always welcome. Let’s continue the discussion. Email me at jmakris@investorplace.com.
On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.
Click here to track her top trades of the week, where she sheds light on market psychology and momentum, while leveraging her deep knowledge of fundamental analysis to deliver event-driven trading strategies.
