Tesla Inc.’s latest results gave bulls a lot of what they wanted: An earnings beat, tantalizing shots of the Cybertruck and an “internal projection of Dojo compute power,” referring to the in-house supercomputer. What they didn’t get was a satisfactory resolution to the defining question of the year: When will Tesla’s margins and market cap stop diverging?
The (non-GAAP) earnings beat of 10 cents in the second quarter was itself less than meets the eye — it was owed entirely to $417 million of “other income” and minority shareholder adjustments below the operating line. From that line and above, pressure from Tesla’s series of price cuts was far more evident. In a sense, the better-than-expected earnings served to highlight the weaker metrics further up the income statement.
Tesla’s closely watched automotive gross margin adjusted for regulatory credits slipped further to just above 18%, eight points down from a year before and the lowest in four years. The company’s operating margin, including all businesses, slipped five points from a year ago to below 10%, the lowest in over two years. The EV maker may tout industry-leading margins, but at the operating line it now looks more middle of the pack.
Much of the underlying financial narrative here was established in the first quarter. Tesla has produced more vehicles than it sold for five quarters straight, undermining claims that the company is merely supply constrained. With an ambitious annual growth target of 50%, compounded, being central to Tesla’s equity story, the upstart has done the old-school automotive thing of cutting prices to move metal. Meanwhile, it prioritizes building more capacity, a down payment on growth tomorrow but another drag on margins today.
Implied average selling prices, excluding leases, fell further to under $47,000, down by more than $9,000 from a year ago. That’s despite a rebound in deliveries of premium Model S and X vehicles this quarter. The implied gross margin per vehicle of less than $9,000 is about $7,000 below the level of a year before. The buildupin inventory and pressure on margins also suppressed cash flow. There was another big working capital headwind in the quarter, if less intense than the prior one, leaving Tesla generating $1 billion of free cash flow — less than half the consensus estimate.
The optimistic take on this is that, as Tesla delivers more and more vehicles, you would expect average vehicle prices to decline — how else to bring electrification to the masses? Margins and cash flow also might come under pressure to fund growth — the Dojo supercomputer has to be paid for somehow — but volume should make up for that to a large degree.
Yet, the gap between movements in top-line metrics and absolute dollars of gross, operating and — even with that timely “other” help — net earnings over the past year is jarring.
What makes it all the more so, of course, is that Tesla’s market cap increased by $132 billion across the same period. That actually doesn’t do the enthusiasm justice: The market cap has increased by more than $530 billion so far this year and, at $923 billion today, it is surely a mere well-timed AI-related story away from hitting the trillion-dollar mark once again. The stock now trades at almost 100 times the forecast 2023 GAAP earnings. And all of this in a year when the cost of maintaining growth is clear to see. Best to lead with the Dojo.
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