Tesla Reported Solid Q2 2022 Results, but Auto Margins Dropped Amidst Challenging Environment

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Q2 Results

Tesla Motors Inc released its financial results for the second quarter of the year [1], after markets closed on Wednesday, which were overall much better than the ones from a year ago, but comparisons with Q1 2022 provide reasons for caution.

During the subsequent earnings call, CEO Elon Muck talked of "one of the strongest quarters in our history" [2], in spite of many challenges such as the lockdown in China.

Total Revenues grew 42% year-over-year, to $16.934 billion, helped by vehicle deliveries and higher selling prices. However, the figures missed estimates and were also lower than the nearly $19 billion generated in the previous quarter.

Higher costs, Shanghai lockdowns, strong US Dollar and the collapse of Bitcoin, had an adverse impact on the firm's profitability. It Reported Operating Income of $2.464 billion, which was significantly lower than the previous quarter, but still constituted an 88% surge over Q2 2021.

CFO Zachary Kirkhorn noted that "Despite these challenges, we were still able to achieve one of our strongest operating margins of 14.6%", which was solid indeed, but still lower that the one achieved in Q1.

Automotive Margins were not good though, since the 27.9% print, was narrower than the ones reported on both Q1 2022 and Q2 2022.

Factory Activity

Tesla (TSLA) had already announced earlier in the month, the delivery of 254,695 vehicles in Q2, which constituted a significant decline from the record levels of the previous quarter. Production declined for the second straight quarter, with the output of 258,580 units.

Tesla Motors Inc was unable to run its factories at full capacity due to "global supply chain disruptions, labor shortages and logistics and other complications". Furthermore, the Covid-19 lokcdowns in China, kept the Shanghai factory closed or partially closed for most of the quarter.

Despite those challenges, mr Musk noted that June was accompanied by "production records" in both Shanghai and Fremont plants. Moreover, the recently inaugurated and first European factory in Germany reached an important milestone last month, with the production of 1,000 cars a week, while the new Giga Texas plant is expected to achieve this target over "the next few months".

The world's wealthiest man had previously said that the current year is all about "scaling up" [3] and during Wednesday's earnings call he talked of "the potential for a record-breaking second half of the year" in terms of production.

CFO Zachary Kirkhorn added that they are still "pushing to reach 50% growth this year", although he warned that this target has become "more difficult".

New Vehicles & Competition

As already established, the leader of the electric vehicle (EV) market will not be introducing any new models this year, during which it focuses in ramping up production, amidst a clearly challenging environment. However, during the next year, it plans to introduce a slew of new vehicles which include the Roadster, the Semi and most importantly the Cybertruck.

The launch of the futuristic and highly anticipated electric truck has been delayed multiple times since it was unveiled all the way back to 2019, in typical Tesla fashion. Yesterday Mr Musk said that he is hoping to start delivering the Cybertruck "in the middle of next year", saying that it might be the firm's "best product ever".

Tesla (TSLA) will be in the sidelines this year, but competition is making strides, while in the electric segment, things are definitely heating up. Rivian Automotive beat everyone to the EV truck segment with its R1T, while the Ford Motor Company has already sold 2,296 F-150 Lightnings - the electric version of the best-seller F-Series truck. [4]

Challenges Ahead

Tesla's second quarter can be considered strong and it still seems to be handling the continuing challenging environment better than most of its competitors, start-ups and legacy automakers alike, but the adverse effects were evident.

Surging Inflation and higher interest rates create an unfavorable environment for the auto industry, as it diminishes disposable income and makes funding for car purchases more expensive. Furthermore, Tesla has already increased its prices multiple times, with Mr Musk talking of "embarrassing levels" yesterday.

Automakers face higher costs from continuing supply chain disruptions, Covid-19 lockdowns and the boom in energy and commodity prices. Surging oil prices may be good for electric vehicles, as they may help steer buyers towards EVs, but prices of many metals that are used in the manufacturing of electric batteries, have also skyrocketed.

Tesla's CEO said that lithium pricing is "insane" and urged entrepreneurs to enter the refining business, calling it a license "to print money". Back in April he had tweeted that Tesla (TSLA) "might actually have to get into the mining & refining directly at scale, unless costs improve". [5]

The EV king also had to lay-off workers, as the economy slows and fears of a recession loom. During a Bloomberg interview in the Qatar Economic Forum last, the world's richest man said that Tesla (TSLA) is reducing its salaried workforce "by roughly 10% over the next probably 3 months or so", adding though that this is "only really a 3-3.5% reduction in total headcount and not super material". [6]

One also has to consider the implication of the Twitter-Musk saga, which drags on since early April. The two sides had eventually agreed on a takeover deal, but Tesla's CEO that he is walking out of the agreement, while Twitter has sued him to enforce the deal. [7]

Mr Musk has exhibited a rather erratic behavior during this period and one has to wonder whether this story will tarnish his image and erode the Tesla brand.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 21 Jul 2022 https://tesla-cdn.thron.com/static/EIUQEC_2022_Q2_Quarterly_Update_Deck_J8VLIK.pdf

2

Retrieved 21 Jul 2022 https://www.youtube.com/watch

3

Retrieved 21 Jul 2022 https://www.youtube.com/watch

4

Retrieved 21 Jul 2022 https://s23.q4cdn.com/799033206/files/doc_downloads/2022/07/June-Sales-Release-Final.pdf

5

Retrieved 21 Jul 2022 https://twitter.com/elonmusk/status/1512505545416224783

6

Retrieved 21 Jul 2022 https://www.youtube.com/watch

7

Retrieved 01 Oct 2022 https://www.wlrk.com/docs/76660099_Final-Verified-Complaint.pdf

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