Real-Time Commentary: Tesla Earnings Dip as Expected, But Margin Rebound Reveals Silver Lining

Core Financial Indicators

$Tesla Motors(TSLA)$  's Q2 revenue in the second quarter was $22.5 billion, a decrease of 11.78% year-over-year. Diluted EPS was $0.33, down 21.43% year-over-year, better than the market's anticipated decline of 23.4%. Adjusted diluted EPS was $0.40. Overall, Tesla's revenue was mixed, but Musk warned that the next few quarters could be challenging. Tesla's stock price initially rose in after-hours trading but later fell, now dropping more than 4%.

Free cash flow was $146 million, down 89% year-over-year, compared to analysts' expectations of $760 million, despite a 126% increase in the first quarter.

Key Highlights and Concerns

Positive signals in the financial report

The highlight of this financial report is the improvement in profit margins, both in the automotive business and the energy storage business, which have increased despite declining revenue. The automotive business's gross margin for the second quarter was 17.2%, lower than the same period last year at 18.5%, but higher than the first quarter at 16.2% and above analyst expectations of 16.5%. Additionally, service revenue was the only segment that grew year-over-year.

Areas below expectations

The decline in automotive business revenue in this financial report was expected. However, the year-over-year decline in energy storage revenue was weaker than market expectations.

Business Segment Breakdown

1.Automotive

In its main business, Tesla's automotive revenue has seen a consecutive two-quarter double-digit YoY decline, with a 16% drop in the second quarter, slightly slowing from the 20% decrease in the first quarter.

The slump in Tesla's automotive business was widely anticipated. At the beginning of July, Tesla announced that its Q2 delivery volume fell by approximately 13.5% year-over-year to 384,000 vehicles. Although this was better than the market's pessimistic expectation of 350,000 vehicles, it still represents the largest single-quarter delivery decline in the company's history.

2. Energy Generation & Storage Revenues

Compared to a year ago, the growth in Tesla's energy storage business revenue slowed down in the second quarter, with a 7% year-over-year decline, while the first quarter saw a 67% growth. The slowdown was partly due to a high base in the same period last year.

Although the revenue from the energy storage business did not reach a new high, the gross profit hit a record for the quarter as profit margins increased. Tesla began deploying Megapacks from Shanghai Megafactory in February, allowing the business to expand into the Asia-Pacific market.

3. Services & Other Revenues

Service revenue, which is related to the growth in the number of vehicles owned and the number of charging stations, was driven by the expansion of the Supercharger network, resulting in a 17% increase in service and other revenue.

Other Things to Watch

During the earnings call, it was estimated that tariff costs would be about $300 million. Musk warned that the situation might be grim in the coming quarters.

Additionally, due to gains from digital assets, specifically Bitcoin, which increased by $284 million, Tesla’s EBITDA for the second quarter also increased by $284 million, accounting for over 8% of the total $3.4 billion EBITDA.

Summary

However, Tesla is clearly a stock priced on future expectations. Much of the rise in stock price following the first quarter report stemmed from the normal progression of the robotaxi business and the pricing in of robotaxi and optimus's valuation, somewhat decoupling from the fundamental performance of the automotive sector.

~Valuation:

Following the release of the financial report, Tesla's PE ratio now exceeds 190 times, positioning it in the 97th percentile over the past three years.

The stock price fell by more than 4% after the earnings release.

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