Tesla's second-quarter revenue exceeded expectations, surging by 47% to a historic high. However, due to price reductions, the gross margin hit a four-year low. | Financial Report News
In the second quarter, Tesla's revenue growth rate was nearly twice that of the first quarter, but the gross margin unexpectedly dropped to 18.2%, and the free cash flow was less than half of the expected amount. The decline in car prices has impacted profitability and revenue, and foreign exchange has negatively affected revenue by $600 million, with two consecutive quarters of decline. Tesla reiterated that the Shanghai Gigafactory has been operating at near full capacity for several months and is expected to start producing Tesla vehicles this year. The company also reaffirmed its production target of 1.8 million vehicles for this year. Tesla believes that sacrificing profit margins in exchange for higher production volume is justifiable and expects the long-term value of the company to increase fivefold or even tenfold. After-hours trading saw Tesla's stock price initially rise by 2%, but the decline later expanded, reaching a drop of over 4% at one point.
Tesla's strong performance in the second quarter has surprised the market, as it rebounded from the price cuts that impacted its first quarter. Both revenue and profit saw double-digit growth, but the price reductions continue to affect profitability, with gross margin falling below expectations and dropping below 20%.
Prior to the release of the financial report, Tesla's stock price fell by 0.7% on Wednesday and dropped by about 2% after the market closed. However, after the report was released, the stock price quickly rebounded, reversing the downward trend and rising by about 2% at one point, but later fell again.
During the earnings conference call, Tesla's CEO, Elon Musk, stated that sacrificing vehicle profit margins in exchange for increased production capacity "makes sense." If the economic environment deteriorates, Tesla will further reduce prices.
Musk expressed "very high confidence" in Tesla's long-term value. He believes that the company's value could reach five times or even ten times its current size. He also recommended holding Tesla as a long-term investment, similar to Warren Buffett's value investing approach, stating that Tesla has long-term investment value and should be bought during market panics.
While Musk was speaking, Tesla's stock price extended its decline after hours, with the decline exceeding 4% at one point.
Q2 Revenue Growth Nearly Doubles QoQ, EPS Rebounds by 20% after a 21% Decline in Q1
After the U.S. stock market closed on Wednesday, July 19, Tesla announced that its revenue in the second quarter of this year exceeded expectations, growing by nearly 50% and setting a new record for single-quarter revenue, surpassing the previous record set in the fourth quarter of last year. Earnings per share (EPS) also surged by 20% after a sharp decline of over 20% in the first quarter:
- In the second quarter, revenue reached $24.927 billion, a record high of 2.5% compared to the previous quarter, and a year-on-year increase of 47%. This growth rate is nearly double the 24% year-on-year growth rate in the first quarter. Analysts had expected a year-on-year increase of 44.7% to $24.51 billion, while revenue in the first quarter decreased by 4% compared to the previous quarter.
- Adjusted EPS under the non-GAAP measure for the second quarter was $0.91, a 20% increase compared to the same period last year. Analysts had expected a year-on-year increase of 6.6% to $0.81, while adjusted EPS in the first quarter declined by 21% compared to the same period last year, marking the first year-on-year decline since the third quarter of 2019.
Tesla stated that it achieved record production, delivery, and revenue in the second quarter, with quarterly revenue approaching $25 billion for the first time. These achievements were made in the current macroeconomic environment, and the company is excited about them.
It is worth mentioning that Tesla's revenue from the major contributor to its past profitability, "selling carbon," has significantly declined and failed to contribute to revenue growth. In the second quarter, Tesla generated $282 million in revenue from selling carbon emission credits, a sharp decrease of 45.9% compared to the $521 million in the first quarter, reaching a low point since the third quarter of 2021.
Second-quarter gross margin rate drops unexpectedly to 18.2%, free cash flow less than half of expectations
The financial report shows that Tesla's profit margin continued to decline in the second quarter, with the gross margin rate falling to a four-year low, highlighting the impact of price reductions and other promotional measures:
- Operating profit in the second quarter was $2.399 billion, a 3% decrease compared to the same period last year and a 9.9% decrease compared to the previous quarter. The operating profit margin in the second quarter was 9.6%, a 493 basis point decrease compared to the same period last year and a nearly 780 basis point decrease compared to the first quarter, reaching 11.4%.
- The GAAP gross margin rate for the second quarter was 18.2%, the lowest level in 16 quarters, lower than analysts' expectations of 18.8%. It decreased by 682 basis points compared to the same period last year and by approximately 110 basis points compared to the previous quarter. The gross margin rate in the first quarter decreased by 977 basis points compared to the same period last year.
Tesla commented that although there were car price reductions in the first quarter and early second quarter, the operating profit margin in the second quarter remained at a healthy level of around 10%. This reflects ongoing efforts to reduce costs, continued production ramp-up in Berlin and Texas factories, and strong performance in other businesses such as energy and services.
The free cash flow in the second quarter was $1.005 billion, a 62% increase compared to the same period last year. Although it rebounded significantly from the two-year low of $441 million in the first quarter, it was only 2.3 times the free cash flow in the first quarter, far below analysts' expectations of $2.18 billion, and less than half of analysts' expectations.
Decline in car prices affects profitability and revenue, negative impact of foreign exchange on revenue of $600 million, two consecutive quarters of decline
In the financial report, Tesla summarized some factors that affected second-quarter revenue and profitability. Positive factors include:
- Growth in vehicle deliveries (despite the headwind of low factory utilization rates for new factories);
- Growth in revenue and gross profit from non-automotive businesses;
- Average cost per vehicle decreased, including a decrease in raw material costs and IRA carbon credits.
Negative factors include:
- After excluding the impact of foreign exchange, the average selling price (ASP) of vehicles decreased compared to the same period last year;
- Costs and other related expenses related to the ramp-up of 4680 battery production;
- Increased operating expenses for the Cybertruck electric pickup, AI, and other major projects.
- The negative impact of foreign exchange on revenue is $600 million.
Wall Street News noted that the negative impact of foreign exchange, specifically the strengthening of the US dollar, on Tesla's revenue has been decreasing for two consecutive quarters. The impact in the second quarter, amounting to $600 million, decreased by 25% compared to the $800 million in the first quarter, far below the $1.4 billion in the fourth quarter of last year.
Tesla summarized that the company will focus on cost reduction, new product development that can drive future growth, investment in research and development, better financing options for vehicles, continuous product improvement, and generating free cash flow. Tesla pointed out that the challenges of the current period of uncertainty are not yet over.
Reiterating that Shanghai Gigafactory is approaching full capacity production and is expected to start producing Cybertruck early this year
Earlier this month, Tesla announced that it delivered over 466,100 vehicles and produced 479,700 vehicles in the second quarter, both reaching record highs for a single quarter. In its financial report, Tesla attributed this achievement to the continued expansion of production at its new factories and the strong performance of the Shanghai and California Gigafactories.
Like the previous two quarters, Tesla stated that the Shanghai Gigafactory has been operating at nearly 100% capacity utilization for several months. At the same time, Tesla expects that the weekly production volume of the Shanghai Gigafactory will not increase significantly, reiterating that the factory remains the company's primary export center.
Last weekend, Tesla revealed that the first Cybertruck, an electric pickup truck, rolled off the production line at its Gigafactory in Texas. The Cybertruck is Tesla's most anticipated model this year. Due to its heavy reliance on the Model 3 and Model Y to boost sales, the Cybertruck is seen as crucial for Tesla's future growth.
Tesla previously announced plans to start deliveries around the end of the third quarter this year. The quarterly report mentioned that the Gigafactory in Texas is currently installing equipment for the production of the Cybertruck and is on track to achieve initial production this year.
During the earnings conference call, Tesla CEO Elon Musk expressed his eagerness to start delivering the Cybertruck later this year.
Reiterating the production target of 1.8 million vehicles this year, with a growth rate exceeding the long-term target of 50%
As before, Tesla's financial report reiterates,
The plan is to expand production as quickly as possible and remain consistent with the company's previously set target of a 50% compound annual growth rate (CAGR) by the beginning of 2021. In some years, the company's production growth may be faster, while in other years it may be slower, depending on various factors. By 2023, the company still expects to exceed the long-term CAGR target of 50%, with an annual production volume of approximately 1.8 million vehicles.