After Tesla, Inc.’s (TSLA) second quarter earnings release on July 24, share prices plummeted by over 9%. Despite the record breaking 95,200 vehicles delivered in the quarter, Telsa reported a loss. This wasn’t the end of the bad news. The announcement that CTO, JB Straubel, would be stepping down to take on a senior advisor role got a resoundingly negative reaction from the Street. While the electric car manufacturer expects to see a profit in the second half of the year, some analysts have doubts.
Now many investors are wondering if they should stay onboard or exit the vehicle.
A Deeper Look at the Q2 Numbers
Tesla reported that a 60% increase in automotive revenue drove the company’s total revenue gain of 59% year-over-year. This amounted to $6.3 billion, which was lower than Wall Street's estimate of $6.4 billion. Non-GAAP loss per share was $1.12, much higher than the consensus estimates of $0.40. Automotive gross margin decreased to 19% from 21% in the prior-year quarter, with the company originally predicting 25% for the second quarter.
Management pointed out that despite falling short of analysts’ expectations, its losses are becoming narrower. Non-GAAP loss per share was down from $3.06 in the year-ago quarter while GAAP loss per share also narrowed from $4.22 in the prior-year quarter to $2.31.
Sales of the company’s energy storage products totaled $368 million, down 2% from the prior-year quarter.
However, TSLA received a $3 billion capital infusion in May. It is now more liquid than ever with its cash position at $5 billion, with $614 million of free cash flow and $2.4 billion in net proceeds from its May equity and convertible debt offerings.
Overall management was pleased with the progress in Q2 despite its losses. “We've achieved record vehicle production and delivery, record storage production and deployment, record services and other revenue with a corresponding reduced lost. As we've mentioned a few times, we stabilized international logistics and delivery operations and higher volumes. As a result of these accomplishments, we once again achieved strong free cash flows, which is only partially attributed to working capital benefits,” said CFO Zachary Kirkhorn.
An Increase in Vehicles Sold Doesn’t Equal Profits
Management’s positive outlook hasn’t calmed investors' fears regarding profitability. While it’s true that TSLA delivered 50% more vehicles in Q2 than in Q1, it still saw losses. The fundamental problem remains that more cars sold doesn’t translate to profits.
Bloomberg writer, Liam Denning, argues that Tesla is selling more of its less expensive Model 3s as opposed to its luxury Model S and X cars. He adds that Tesla is not selling enough cars at enough of a margin to realize a bigger profit overall, and thus in lies the problem.
To combat this, management said that it will continue to prioritize Model S and X inventory reduction.
Going forward, management maintained its guidance on deliveries for the full year. It expects to see deliveries fall within the range of 360,000 to 400,000, representing 45% to 65% year-over-year growth.
While the company reduced its 2019 capex guidance to be around $1.5 billion to $2 billion, it is aiming for positive GAAP net income in Q3 and the following quarters. It remains focused on continuous volume growth, capacity expansion and cash generation.
Merrill Lynch analyst, John Murphy, doesn’t believe the company can deliver on this guidance. “Tesla sentiment has improved since the company's Q2 deliveries announcement, but a number of hurdles still remain and expectations are still too high for the rest of 2019 and beyond,” he said on July 24. The analyst reiterated his Sell rating and $225 price target, suggesting 15% downside potential.
Another analyst, Dan Levy, also reiterated his Sell rating and $189 price target on July 24 after news of the CTO’s departure broke. He believes share prices could drop by as much as 29% over the next twelve months. “Straubel’s exit is a significant transition for Tesla, as he has been one of the most important members of Tesla management,” the Credit Suisse analyst said. Levy boasts an impressive 88% success rate.
The Bottom Line on TSLA
The Street has mixed feelings regarding Tesla. It has a ‘Hold’ analyst consensus, with it receiving 8 Buy ratings, 6 Holds and 12 Sells over the last three months. It has an average price target of $263, suggesting 1% downside.