ii view: Tesla profit beats Wall Street forecasts

Shares for this iconic electric car maker are down almost 30% in 2022 and auto margins are under pressure. Buy, sell, hold?

Second-quarter results to 30 June

• Revenue up 42% to $16.93 billion
• Adjusted earnings per share up 57% to $2.27 

ii round-up:

Electric car maker Tesla (NASDAQ:TSLA) again reported earnings which beat Wall Street forecasts as it delivered over 254,000 vehicles during the second quarter to the end of June. 

Earnings per share (EPS) of $2.27 surpassed analyst estimates of nearer to $1.80 per share as vehicle demand and product price increases helped push revenues up 42% year-over-year to $16.93 billion. EPS was $1.45 a year ago and $3.22 in Q1 2022.

Gross margin at the automotive division declined by 46 basis points year on year to 27.9%. That compares with 32.9% in Q1 2022. Tesla blamed inflation and greater competition for car parts. 

Tesla shares rose marginally in afterhours US trading having come into this latest announcement down around 30% year-to-date. Shares for rivals Ford Motor Co (NYSE:F) and General Motors Co (NYSE:GM) are both down around 40% during 2022, while the S&P 500 index is down almost 17%. 

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Tesla highlighted challenges including the temporary shutdown of its manufacturing plant in Shanghai during the period because of Covid restrictions, plus higher raw material and transport costs. 

However, new factories in Berlin Germany and Austin Texas continued to increase production, with its Berlin plant now having produced over 1,000 cars in a single week. Aided by its two new factories, Tesla reaffirmed its expectation for 50% average annual growth in vehicle deliveries over a multi-year horizon.

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Sales for its Services division, including its network of superchargers also open to non-Tesla customers, grew by over 50% year-over-year to $1.47 billion. 

Broker Morgan Stanley retained its overweight stance on the shares, highlighting that while these latest results were strong, it is prepared for near-term profit margin headwinds as Tesla is likely to meet new challenges in ramping up production, particularly in Berlin. 

ii view:

Founded in 2003, Tesla today makes both electric vehicles and energy generation and storage systems, along with other services including a used car business. A constituent of the S&P 500, it has a stock market value of over $700 billion compared to major German rivals Volkswagen AG (XETRA:VOW) and Mercedes-Benz Group AG (XETRA:MBG) both at under $100 billion. 

For investors, a cocktail of concerns overshadowing the economic outlook including rising interest could deter potential car buyers. Navigation of the pandemic, given its Chinese operations, remains ongoing, elevated raw material costs such as lithium used in batteries cannot be dismissed, while the stock's valuation continues to ask questions.

Tesla trades on about 20 times Morgan Stanley's profit forecasts and 35x forecasts for 2025 profit. The broker admits that auto investors might find this "unacceptably high", although tech fans will likely be undeterred given strong free cash flow and expected strong profit growth for the rest of this decade.

Increases in the price of its cars is helping Tesla offset higher input costs. Robust customer demand, new production plants and hopes to eventually begin selling its cyber pickup truck and even possibly making a driverless or robotaxi, offer future growth potential. On balance, and while the road ahead will likely remain bumpy, fans of the car maker are likely in it for the long term.

Positives: 

• Robust customer demand
• Climate change concerns are growing globally

Negatives:

• Competition from other manufacturers is increasing
• Persisting valuation concerns

The average rating of stock market analysts:

Buy