Tesla – European Model Ys On Track Despite Chip Shortage

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Tesla Inc (NASDAQ:TSLA) reported second quarter revenue of $12.0bn, ahead of market expectations for $11.3bn, and up 98% year-on-year. That reflects a 148% increase in Model 3/Y deliveries, more than offsetting a decline in Model S/X deliveries due to product updates. Average sales prices fell 2% year-on-year, reflecting higher sales of lower priced cars in China.

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Tesla's Q2 Earnings

Total revenue included $10.2bn in Automotive revenues, up 97% year-on-year despite a 17% fall in automotive credits, which came in at $354m. Automotive gross margin in the quarter reached 28.4%, or 25.8% once regulatory credits are eliminated. Elsewhere in the business, Energy Storage saw sales more than double year-on-year to $801m, while Services & Other revenue rise 95.3% to $951m.

Operating margins hit 11.0%, up from 5.7% last quarter and 5.4% a year ago. That’s despite a $176m share based payment to Elon Musk, lower regulatory credit revenues and a bitcoin related impairment of $23m. As a result of the improved operating profit, earnings per share rose to $1.02, well ahead of analyst expectations.

Capital Expenditure rose 176% to $1.5bn. That reflects ongoing construction of the Berlin and Texas Gigafactories, expansion at plants in Shanghai and California, and continuing investment in product development.

Despite the increased capital expenditure, the group reported $619m of free cash flow, up from $418m a year ago. As a result, net cash rose from $6.3bn at the start of the quarter to $6.8bn.

Tesla didn’t update longer term production or profit guidance, although reiterated that it has sufficient liquidity to fund its product roadmap and long-term expansion plans. The first Berlin and Texas Model Ys are expected in 2021, although the launch of the Semi truck programme has been pushed to 2022 due to supply chain challenges. The group is currently producing at the limits of available parts – with particular challenges in semiconductor supply.

Tesla shares rose 1.4% in aftermarket trading.

Competing In The Automotive Market

Nicholas Hyett, Equity Analyst at Hargreaves Lansdown:

“The main impression of Tesla from these numbers is one of resilience. Despite the decline in higher margin Model X/S deliveries, an increase in lower value Chinese vehicles and potential headwinds from global computer chip shortages, Tesla has managed to grow production substantially and crucially margins have improved dramatically too.

Part of that is down to Tesla achieving the scale that’s key to competing in the automotive market. Because factories are essentially giant fixed costs, pumping more cars through the same footprint boost revenues without boosting costs by the same degree. What makes these numbers all the more impressive is that, despite the record $1.5bn in capital expenditure, scale has been achieved while keeping cash flows positive. Even if you take off the controversial regulatory credit sales the group remains in the black.

As a result, the group’s on course to deliver its first European Model Ys this year, despite problems in the semiconductor supply chain being felt across the industry. The Semi truck programme has been sacrificed to make that happen, pushed back to 2022, but Tesla investors should be used to product delays by now – they’re something of a hallmark of the electric car giant.

There have been missteps – and it’s hard to see a $23m write-down in the value of the group’s bitcoin hoard as anything other than an unnecessary own goal. However, the negatives are insignificant in the context of wider successes this quarter.”

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