Tesla's Q2 Earnings Beat Estimates But Disappoints Investors

In the midst of an intensifying price war, Tesla reported a fairly impressive increase in Q2 profits as part of its latest earnings report.

Overall revenue rose 7% from the last quarter to reach just about $25 billion, and earnings reached just over $2.7 billion, up from $2.5 billion in Q1 and $2.3 billion from the second quarter of 2022. This means the company beat expectations on both revenue and earnings, and this quarter's results led to an earnings per share (EPS) of 91 cents.

These results are good for Tesla because they proved its profits could grow despite recent price cuts, and demonstrated the company's resilience and growth within the current macroeconomic environment.

Tesla's Earnings Call and the Road Ahead: Challenges and Opportunities

However, the company's earnings call was "disappointing" for investors. In particular, factory upgrades slated for this quarter, and a lack of details on the Cybertruck production line, was enough to tank the stock in early morning Thursday trading.

Increasing competition in the EV industry has led to shorter wait times for vehicle deliveries and substantial discounts, straining profits. Not to mention, the industry as a whole is navigating rising interest rates, affecting monthly loan payments for car buyers and leading some banks to refrain from lending to borrowers with weaker credit histories.

Despite these challenges, Tesla remains one of the few profitable players in the market, with the Model Y becoming the best-selling vehicle globally in Q1. At the same time, many legacy ICE automakers are draining billions to enter the EV business.

The forthcoming year could be decisive for Tesla's market dominance. The company's market share has shown signs of contraction. The company manufactured 59% of EVs sold in the US in Q2, down from 65% a year earlier. Tesla leads the EV market in the US and Europe, but has faced pressure due to lower average sales prices and the cost of ramping up production for its new pickup truck, the Cybertruck.

Tesla says the progress on the Cybertruck factory tooling is on track. Set to hit the market by year-end, the Cybertruck will enter a crowded field with competitors like Ford's F-150 Lightning and Rivian's R1T. Ford just announced its own price cut of up to $10,000 for the Lightning. Investors claim they need more than faith to get too excited.

In Europe, Tesla is gaining ground on established automakers like Fiat while also facing competition from Chinese manufacturers like BYD and SAIC. To stay competitive against these local automakers and their newer models in China, Tesla had no choice but to cut its prices further. Tesla also told investors it may have to cut prices again later this year - which will thin its margins even further.

Unpacking Tesla's 2023 Q2 Earnings: Profit Growth Amidst Market Uncertainties

Tesla also made significant progress in AI development with the start of production of Dojo training computers. The company plans to spend $1 billion on these machines to help process its Autopilot data in order to make its Full Self Driving feature smarter. These in-house designed systems aim to satisfy the company's immense neural net training needs and replace the need for Nvidia A100s which are in short supply.

Besides its auto business, Tesla also offers solar panels and batteries for home and grid power storage, which we recently pointed out has grown faster than its EV sales in the past. This includes products like Tesla's Powerwall and Megapack home and business storage solutions.

Repeating history, Tesla's second-quarter financial update for 2023 showed a promising growth trend in the company's energy storage business. Its deployments increased by a substantial 222% year-on-year (YoY) in Q2 to 3.7 GWh.

In total, the energy generation and storage business reported revenue of $1.5B. This marks a substantial increase, from $866 million in Q2-2022 to $1,509 million in Q2-2023, representing 74% YoY growth, and reflects the growing consumer and corporate interest in alternative home energy storage solutions.

Below, we break down the numbers from the full report:

Tesla's Q2 Earnings Report Explained

According to the company's Q2 2023 financial report, Tesla's performance marked a record quarter with its best-ever production, deliveries, and almost $25 billion in revenue. Here are the key findings:

• Tesla revealed a solid overall YoY growth of 47%, leading to total revenue of $24.9 billion. This growth in revenue is attributed to an increase in vehicle deliveries and an expansion in other sectors of the business (like energy, which we mentioned above).

• The lower cost per vehicle, including lower raw material costs and IRA credits, as well as an increase in vehicle deliveries and gross profit growth in the Energy business and Services & Other sectors, positively affected operating income.

• However, operating income slightly fell year-on-year, standing at $2.4 billion for Q2, resulting in an operating margin of 9.6%.

• This decrease was primarily due to a reduction in the average selling price (ASP), costs related to the production ramp of 4680 cells and other related charges, and increased operating expenses driven by large projects such as the Cybertruck and AI initiatives.

• Tesla believes that a margin of 9.6%, or as they say, "approximately 10%", is "healthy" and in line with what it's looking for, and cites its continual efforts in cost reduction and successful production ramps in Berlin and Texas, as well as the strong performance in its Energy and Services & Other businesses, as the main contributors to keeping it in a sweet spot.

• Other income was positively impacted by foreign exchange movements on certain intercompany balances. Tesla's cash equivalents and investments rose sequentially by $700 million to $23.1 billion in Q2.

• The company has also managed to generate a free cash flow of $1.0 billion, with a $0.7 billion quarter-over-quarter increase in cash and investments, bringing the total to $23.1 billion. This increase was partially offset by other financing activities, including debt repayments.

Here are the exact numbers:

• Revenue Growth: Tesla's automotive sales showed a consistent increase from Q2 2022 to Q2 2023, reaching $20.419 billion in Q2 2023 from $13.67 billion in Q2 2022. Total revenues also showed a similar growth trend, reaching $24.927 billion in Q2 2023 from $16.934 billion in Q2 2022.

• Profitability: Tesla's net income, a key measure of profitability, increased from $2.259 billion in Q2 2022 to $2.703 billion in Q2 2023. Operating income decreased slightly from $2.464 billion in Q2 2022 to $2.399 billion in Q2 2023, which might signal increased operating expenses or cost of sales.

• Operating Expenses: There was an increase in both Research and Development (R&D) expenses from $667 million in Q2 2022 to $943 million in Q2 2023. Also, "Selling, General and Administrative" expenses grew from $961 million in Q2 2022 to $1.191 billion in Q2 2023. This indicates Tesla is investing in innovation and the expansion of its operations.

• Cash Flow: Tesla's cash flow from operating activities rose from $2.351 billion in Q2 2022 to $3.065 billion in Q2 2023, showing a healthy operational cash generation. The company's cash position decreased slightly from $18.887 billion in Q2 2022 to $15.879 billion in Q2 2023, which could be due to increased capital expenditures, that grew from $1.73 billion in Q2 2022 to $2.06 billion in Q2 2023.

• Assets and Liabilities: Tesla's total assets grew from $68.513 billion in June 2022 to $90.591 billion in June 2023, showing the company's increased capacity for growth and investment. On the other hand, total liabilities also increased from $30.855 billion in June 2022 to $38.409 billion in June 2023, reflecting the company's financial obligations.

What's the Verdict?

Tesla's Q2 2023 results show continued strength and growth across most of the key business metrics. It displays resilience in a challenging macroeconomic environment and continues to invest in innovative products and technology to fuel future growth.

Despite some pressure on profit margins due to increased expenses and pricing adjustments, the company's healthy cash flows and robust increase in revenues reflect its strong market position and operational efficiency.

From these insights, it is clear that Tesla continues to grow in terms of revenue and profitability. Despite the increase in operating expenses and capital expenditures, the company maintains a robust operating cash flow. The slight decrease in cash and cash equivalents suggests that the company is heavily investing back into the business.

And of course, the growing liabilities are something to keep an eye on, as they could affect the company's financial health down the line if not managed effectively.

It seems the company suffered from the burden of expectation. Expectations were too high, and so even positive results led to disappointment. Because Wall Street modeling pegged automaker profit margins at 18%, Tesla's profit margin of 9.6% was incredibly discouraging. We'll see where the company (and its market cap) go from here.