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Tesla - challenging environment squeezes margins

Second quarter revenue rose 42% to $16.9bn, as growth in vehicle deliveries and a higher average selling price...

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Second quarter revenue rose 42% to $16.9bn, as growth in vehicle deliveries and a higher average selling price helped Automotive sales rise 43% to $14.6bn. Revenue from regulatory credits shrunk while other parts of the business, like Energy and Services and Other expanded.

Operating income rose 88% to $2.5bn. This was despite a 13% uptick in operating expenses as higher raw material, commodity and logistics costs weighed. This meant Automotive margins fell from 28.4% a year ago to 27.9%.

Profits also suffered from the declining value of bitcoin and the expenses associated with the Shanghai shutdowns. These headwinds were more than offset by revenue growth.

Shares rose 1.8% in pre-market trading.

View the latest Tesla share price and how to deal

Our View

Tesla's a textbook example of economies of scale. It's gigantic Gigafactories are expensive to ramp up, but once their costs have been covered, a greater proportion of each car sold drops through to profits.

That's the crux of Tesla's business, so shutdowns in Shanghai and supply chain bottlenecks had a sizable impact last quarter. That's the reason operating margins fell from 19.2% to 14.6% over the past three months. But these headwinds should be temporary. That means operating margins in the high-double digits, nearly double many competitors, are likely sustainable if demand for the cars keeps up.

This doesn't appear to be a problem even as the group raises price to combat cost inflation. The waitlists for new cars are still lengthy. But affordability is still part of the equation. Inflation's causing a cost-of-living squeeze around the world and the impact on consumer behaviour hasn't been fully realised yet. Musk himself referred to current price levels as "embarrassing."

There's no denying Tesla's solid position in the electric vehicle space, and it's clear EVs will take over the roads in the future. This structural tailwind will benefit Tesla for years to come, but as more carmakers throw their hats in the EV ring Tesla needs to consider its next steps

We're pleased to see that Tesla's already thinking about how to maintain its status as an industry disruptor. Software is one such potential outlet - the group's self-driving technology is already delivered to existing vehicles through wireless updates. This lends itself well to software subscription programmes, which would help pad profits and squeeze more out of cars already sold.

Another potential growth avenue is insurance. It's still early days but Tesla is already seeing green shoots here. Driver data is used to set premiums. This creates an instant feedback loop, ultimately encouraging safer driving. Tesla is responsible for fewer accident costs and customers save money. Further afield are aspirations for a fully self-driving robotaxi.

Notably, it will be a long time before any of these initiatives can meaningfully move the needle.

Tesla's eyewatering valuation makes it look more like a hyper-growth disrupter than a car company. With that comes a lot of risk. Investors have to believe that a self-driving robotaxi and human-like robot are viable business options. Elon Musk is nothing if not eccentric, so his aspirations for the future tend to be larger than life. That creates a lot of near-term volatility because missteps and disappointment along the way are pretty much guaranteed.

Tesla key facts

All ratios are sourced from Refinitiv. 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.

Second Quarter Results

Vehicle production rose 25% with Model Y production up 19% and Model X production up from 2,340 to 16,411. Model X deliveries rose from 1,895 to 16,162. Model Y deliveries were up 20% to 238,533. However, both production and deliveries declined from the previous quarter.

Manufacturing challenges persisted through the quarter, limiting the ability to run gigafactories at full capacity. The shutdowns in Shanghai persisted for most of the quarter, resulting in higher per-car costs.

Energy Generation and Storage saw revenue rise 8.1% to $866m and revenue in Services and Other, which includes used car sales, collision centres and charging technology, rose 54.2% to $1.4bn. The number of supercharger stations increased 34%, and the group expressed plans to open this to non-Tesla electric vehicle users.

Free cash flow was $621m in the second quarter, in line with last year. The group's net cash position improved from $6.8bn to $14.5bn improved profitability and lower debt obligations.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 21st July 2022