It turns out that Tesla’s aren’t quite like iPhones
And people aren’t buying into a regular upgrade cycle. That’s bad news for the electric car company, which saw a 13.2% drop after its Q2 earnings released last Wednesday. And a lot of that has to do with sales. Not the numbers, which on paper look good: all-time high delivery numbers of 95,200 cars from the beginning of Q2 to July 2, and a 40% improvement in quarter-over-quarter revenue - but rather in the way they break down. That, plus uncertain guidance (Musk says they’re on track to hit 350,000-400,000 deliveries by the end of the year, but it’s hard to see how) resulted in the disappointing stock performance we saw.
So what does the breakdown mean?
Well, 158,375 cars are great for the first half of the year, but the grand majority of those deliveries (77,000), were of the cheaper Model 3, which runs for around $40,000 retail, instead of the more expensive S and X versions. This means that Tesla actually had a net loss of $408 million in Q2, with gross margins falling from 20.6% a year ago to 18.9% now. And a lot of that has to do with the reduction of subsidies across the world, with accompanying price cuts - meaning that without tax incentives, Teslas are suddenly no more attractive than a Chevy Bolt.
Tesla actually had a net loss of $408 million in Q2
Any more bad news?
Yes, actually - the earnings call also revealed another high profile departure from Tesla - this time the CTO, J.B. Straubel, who’s been on board since 2005. While the now ex-CTO will remain with the company as an advisor, Straubel also liquidated $30 million worth of Tesla shares, which has given some a signal that even old hands like Straubel are losing faith in the company. And Musk is still the erratic CEO - the last time he wiped 7% off the stock price with just a few tweets, and there’s no guarantee it won’t happen again.
Is there any good news at all?
To be honest, not much, except hope and faith. There are some signs of light; however - Tesla still has $5 billion in cash, enough to run on fumes for the next two years. And it isn’t completely unrealistic to expect the company to hit its guidance for deliveries, even if that would mean 45% to 65% year-over-year growth. And Musk did say that he expects ‘positive GAAP net income in Q3 and the following quarters’.
Tesla still has $5 billion in cash, enough to run on fumes for the next two years
What We Think
Tesla is definitely in rocky waters, and it’s becoming more and more of a question if Tesla can turn a profit delivering cheaper cars. While the results so far of Model 3 sales haven’t been promising, as it keeps being pointed out - more cars sold doesn’t necessarily result in profits if the margin on the vehicles sold isn’t high enough to offset the costs. And with subsidies and tax incentives being cut around the world, resulting in price cuts for Tesla’s ‘luxury offerings,' those margins fall even further.
More cars sold doesn’t necessarily result in profits
The cars themselves are still winning out on reviews, but as cheaper EV alternatives enter the market from competitors, Tesla is quickly losing its first-mover advantage. Ultimately, for Tesla, it comes down as it always had - do you trust in Musk and his stories? Or do you judge a book by its contents? There are some truly innovative technologies waiting in the wings at Tesla - but only time will tell if they pan out.
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