Tesla Inc. investors have pushed its market valuation up by $550 billion this year, shedding Tesla’s profit, which is shrinking as price cuts drive sales. Tesla’s analyst estimates Q2 revenue results may force a rethink. Tesla’s Q2 revenue on Wednesday reported across the board gains in most financial and production measurements, but Tesla’s profit margins slipped.
Tesla’s price cut impacted profit
Net income for the Q2 surged 20 percent to $2.7 billion while total revenue, including its solar business, gained 47 percent to $24.9 billion.
When Tesla’s profit report was shared on Wednesday, Wall Street analysts were expecting its automotive gross margin to come in at around 20%, according to the average of estimates compiled by Bloomberg. That would be a drop in Tesla’s profit from around 28% in the same period a year ago.
Vehicle production rose 86 percent to nearly 479,700 vehicles while deliveries were up 83 percent to 466,140 units.
But Tesla’s profit fell in the Q2 from the previous three months, squeezing Tesla’s price cut, efforts to boost sales.
Tesla facing scrutiny
Tesla’s considerable price cut on its vehicles have helped boost sales for Tesla but have weighed in on Tesla’s profitability. With the stock trading at 70 times forward earnings compared to around 5.8 times for General Motors Co. and about 8 times for Ford Motor Co. Tesla faces scrutiny as to how it can maintain the lead in a market of slowing sales and rising inventories.
Ivana Delevska, chief investment officer at SPEAR Invest, said in an interview. “If Tesla can’t deliver on margins, the rally could stall out, as Tesla’s investors would question the strategy to cut prices.”
Under pressure from increasing competition and an uncertain economy, Tesla’s price cut, increased discounts with other incentives to reduce inventory were introduced.
Market valuation of Tesla
Tesla’s price cut along with government tax breaks for EV buyers in the U.S. and elsewhere, ate into Tesla’s profit whose margins have long been the envy of the auto industry.
Tesla reported gross margin of 18.2 percent for the April-June period, compared with 19.3 percent for the Q1. Gross margin in the Q2 of 2022 was 25 percent.
Tesla said it was focusing on reducing costs and on new product development, and that the “challenges of these uncertain times are not over.”
The company said lower raw-material costs and government tax credits helped with Tesla’s price cut for vehicle.
The company did not break out its automotive margin, a closely watched gauge of Tesla’s profitability which was more than 30 percent at the start of last year.
On an adjusted basis, Tesla earned 91 cents per share. Tesla analyst estimates a profit of 82 cents per share, according to Refinitiv IBES data.
Tesla’s profit may end up being a sideshow if Elon Musk, the CEO gives Tesla investors highly anticipated updates on new products, refreshes of existing vehicles and AI. A sign that margins can start improving from here on can also provide another boost to the stock. Wedbush analyst Daniel Ives expects Tesla’s Q2 revenue to mark the trough for margins.
Tesla reiterated that it expects to achieve deliveries of around 1.8 million vehicles this year.
Tall order
The automaker had predicted in October it would sell every car it manufactured in the foreseeable future but in the Q2 it produced 13,560 more vehicles than it delivered. That number, though, was narrower than Q1 revenue.
Tesla said global inventory is now 16 days of supply, up from 15 days last quarter and four days a year ago.
Tesla Cybertruck
Analysts have said new models, such as the Cybertruck, could help Tesla maintain its extraordinary sales-growth rate. However, the long-awaited truck likely will not be available in large volumes until next year. The first Cybertruck rolled off the line in Tesla’s Austin factory just recently, the company said over the weekend.
Stock at closing
Tesla analyst estimates average profit for the three months ended in June has dropped by 26% since mid-January. Those slumping expectations contrast sharply with the more than 140% rally in the stock this year that has lifted market valuation of Tesla above $940 billion. The shares are trading up as much as 1.4% Wednesday ahead of the results.
