Revenues in the second quarter of $6.0bn were down 5% year-on-year but still some way ahead of analyst expectations. The group benefited from higher Model 3 and Model Y deliveries, increased sales of regulatory credits and improved results in energy generation and storage.
Factory shutdowns resulted in higher operating costs, although these were mitigated by temporary reductions in employee remuneration. As a result overall net income rose quarter-on-quarter and remained positive at $104m.
Tesla's share price rose 4.3% in aftermarket trading.
The half year marked the first time Tesla has managed to knit together four successive profitable quarters. That opens the door to inclusion in the S&P indices, a coming of age that means a potential host of new investors.
Recent quarters have been undeniably impressive. Production and deliveries weathered the downturn comparatively well despite factory closures. Pay cuts for staff have helped keep costs down too, and margins have actually improved.
However, it is worth having a closer look at what's driving growth.
Automotive revenues only crept up 1% quarter-on-quarter despite a 3% increase in deliveries. What's more, the entire revenue increase was driven by a 21% increase in revenues from regulatory credits. Credits accounted for 8% of automotive revenues in the second quarter. Exclude these credits and margins were the lowest they've been in 12 months, in fact exclude these credits and Tesla would have been profitable in just one of the last four quarters.
Tesla earns regulatory credits in recognition of its zero-emission vehicles and sells them to other manufacturers who need to offset their emissions. Broadly speaking, as more Teslas hit the road the group earns more credits. However, as rivals increase their electric vehicle output those credits will become less valuable. In short, credits provide a valuable cash boost now, and will likely continue to do so in the near term, but they're not a long term lever for the business. Investors need to focus on the core automotive manufacturing business.
Tesla has done an excellent job of ramping up production, with new factories popping up on an annual basis. However, Tesla's "if we build it, they will come" approach is a concern for us.
Recent price cuts suggest demand for Tesla's is far from bottomless. While wage cuts may have protected margins this quarter they are meant to be temporary, and ultimately the group needs to continue to rapidly increase sales if it's to move forward. However, if prices have to be cut to stimulate demand at the current level of production that raises questions about the appetite for the hundreds of thousands more vehicles Tesla needs to produce and sell every year.
This cuts to our core concern with Tesla. The group's valuation, which at $295bn and a PE ratio of 176 makes it the most valuable automotive company in the world, is predicated on massive growth. The economic outlook is gloomy and with even the 'affordable' Model 3 priced at a fairly hefty £40,000+ it's hardly an ideal time to be asking drivers to reach for their credit cards. Meanwhile rivals are pouring billions into closing the technological gap (VW alone had been looking to spend $60bn on electric cars over 5 years).
Tesla has enjoyed a period of technological superiority, with a great brand and perhaps most importantly a great investment story. That's helped it achieve things that at times looked impossible. However, as time goes on and the group's valuation gets higher the hurdles for success only become more formidable.
Tesla key facts
- Price/earnings ratio: 176.0
- 5 year average Price/Book ratio: 77.3
- Prospective yield: 0%
Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Half Year Results
Automotive gross margins were steady quarter-on-quarter, at 25.4%, and up substantially year-on-year. However, excluding regulatory credit sales - where Tesla sells credits it earns from its low carbon operations to other car manufacturers - gross margins actually declined to 18.7% from 20.0% in the first quarter.
A slight decline in operating costs meant operating margins improved to 5.4%. This is despite a decline in average selling prices, and reflects lower costs associated with both Model Y and Chinese made Model 3s as well as an increased contribution from software and 285.6% increase in regulatory credit sales.
Capital expenditure rose substantially year-on-year (up 118%) and quarter-on-quarter (up 20%) to $546m. However, strong operating cash flows meant free cash flow remained positive at $418m. The group finished the half with net cash (excluding vehicle financing) of $94m.
Tesla now has installed capacity to manufacture more than 500,000 vehicles a year. It remains the group's target to deliver half a million vehicles in 2020. The group believes its operating margins will continue to improve over time.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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