In the dynamic landscape of electric vehicle manufacturing, Tesla Inc.'s (TSLA, Financial) second-quarter performance is a testament to its triumphs and hurdles. The period witnessed an impressive surge in production and deliveries, surpassing market predictions.
This discussion delves into Tesla's exceptional deliveries, surpassing expectations through increased production while highlighting challenges stemming from lowered prices affecting profitability and a discussion of the company's financial performance, market value and growth prospects.
Tesla achieves record deliveries despite pricing and profitability challenges
Production and deliveries of Tesla vehicles in the second quarter showed exceptional growth that exceeded market forecasts. During the quarter, the EV behemoth manufactured nearly 480,000 vehicles and delivered over 466,000 units. Additionally, the company was able to close the 13,560 unit deficit between production and deliveries, in comparison to Q1 2023, with 17,933 units.
Remarkably, the increased delivery rates result from the company's increased production capacity, which includes new factories in Austin, Texas and Germany. However, the high delivery rates came at a price. The necessity to lower prices to increase demand has already impacted Tesla's profitability and is expected to continue to do so. Moreover, the impending release of the Cybertruck and collaborations with other automakers to utilize the charging network could further increase the income streams and make up for the lost profitability.
Competitive position and pricing strategy
The impressive element of Tesla's outstanding deliveries is that the business continues to be a prominent EV manufacturer despite fierce competition in both domestic and international markets. In the U.S., its position may not be challenged for some time by expanding competition from traditional manufacturers that have increased their EV options. Similarly, Tesla's strong brand reputation, technological innovation and expanding charging infrastructure strengthen its position as an EV leader in China, its second-largest market, behind BYD.
Recently, the Texas-based company has also provided further incentives to cut inventories. For example, Tesla announced sticker prices for the new "standard range" S and X models are $78,490 and $88,490, respectively, available for delivery between September and October and are $10,000 less expensive than the previous lowest-priced variants.
Future growth prospects
Tesla's excellent delivery figures and production capabilities indicate real progress toward achieving its 1.8 million units annual delivery objective. When it reaches the target, the market's perception may change and take a long-term bullish turn in the rapidly expanding EV sector. In the long run, Tesla might be able to produce 5 million vehicles annually by 2030.
Despite the earnings beat, Tesla faces margin and profitability concerns
For the three months ended June 30, Tesla outperformed Wall Street's expectations with adjusted diluted earnings per share reaching 91 cents and revenue of $24.9 billion. But since that report, shares have been under pressure, falling 15%.
From over 100,000 deliveries in 2017 to over 1.3 million in 2022, Tesla's total car volume has increased, and its average cost of goods sold per vehicle has decreased by almost 50% during the same period, from $84,000 to around $39,000. As a result, gross profit margins have increased from 20% to 26% when regulatory credit sales are excluded. While some of this can be attributed to producing more midsize and SUVs than luxury cars, the company's focus on lowering production costs due to scale is responsible for most of the drop.
Investor concerns and stock performance
This year, persistent price cuts by the management team that have reduced margins have alarmed investors. Compared to the same quarter last year, Tesla's gross margin and operating margin were much lower at 18.2% and 9.6%. The fact the company continues to outperform venerable automakers like Ford (F, Financial) and General Motors (GM, Financial) in terms of profitability is reassuring.
Nevertheless, the good news for investors is that Tesla could still report a high net profit of $2.7 billion, or 10.8% of revenue, and it was up 20% year over year due to proper management of operating expenses.
Undoubtedly, the company is already among the most valued and adored in the entire world. It is difficult to wager against Elon Musk in any capacity, particularly given that he continues to make significant contributions to the world.
On the other hand, it is understandable why investors could also be tempted to sell their holdings and record a profit if they have been waiting on unrealized gains after the stock's spectacular increase in 2023 and its 1,056% gain over the past five years.
Valuation and investment outlook
Tesla's current price of $235.78 is significantly lower than its GF Value of $452.51, suggesting the stock may be undervalued.
On the contrary, the price-earnings ratio of 66.79 and price-sales ratio of 8.72, respectively, signal that investors are willing to pay a premium for the stock, which could be due to high growth expectations. Even though the stock doesn't look cheap, considering the traditional financial metrics, Tesla remains a leader in the space and a compelling investment over the long term considering the production expansion plans.
Takeaway
As impressive as Tesla second-quarter results were, concerns linger regarding its margins and profitability. The company's journey from delivering over 100,000 vehicles in 2017 to more than 1.3 million in 2022 came with significant reductions in production costs, contributing to improved gross profit margins.
Achieving the 1.8 million milestone could prompt a positive shift in market perception and bolster Tesla's position in the burgeoning EV sector. As the company marches forward, projections of producing 5 million vehicles annually by 2030 add to its promising trajectory.
Conclusion
In conclusion, despite challenges to profitability and pricing, Tesla remains an industry leader and a compelling potential long-term opportunity. Its achievements and ambitious production plans underscore its potential for continued growth and innovation in the ever-evolving EV landscape.
