Tesla Q2 pre-earnings call: what you need to know

By Kirsteen Mackay

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Tesla Q2 earnings are due. Will it beat analyst expectations and is it a good investment? As always there are many details to consider.

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Electric vehicle (EV) supremo Tesla (NASDAQ: TSLA) reports its Q2 earnings after market on July 26. With the mention of flying cars, rising revenues, and potential profits on the horizon, investors are once again impatient to find out how it has fared.

Confident vehicle sales

The company has given investors a preview of what to expect by releasing EV delivery figures for Q2. It sold 201,250 vehicles, a progressive increase of 9% and year-over-year growth of around 130%.

For Q2, analyst consensus for revenue estimates comes in at around $11.2 billion. This is an 86% rise on Q2 2020 revenue figures, which were decimated by Covid-19 lockdowns.

However, its results in Q2 last year were significant because it marked the first time the company had posted a profit for four straight quarters, making it eligible for entry into the S&P 500 index. It finally gained admission in December.

In Q2 this year, growth is expected to slow slightly due to a recent pause in production of its Model S and Model X cars. But analysts expect other sales will make up for this from its mass-market EVs and software upgrades.

Tesla Model S – Courtesy of Tesla, Inc.

Reassuringly, Tesla’s gross margins are better than the rest of the auto industry.

A higher mix of Model Y sales should boost margins because it costs around the same as a Model 3 to produce but sells at a higher price point.

Meanwhile, it still faces headwinds from computer chip shortages, rising freight costs, and soaring commodity prices.

Adjusted earnings per share (EPS) are forecast to come in around $0.96 per share, up 146% from $0.39 in Q1.

Moreover, some analysts believe Tesla’s core automotive business could finally turn profitable this quarter.

Regulatory credit controversy

Regulatory Credits constitute a significant driver of Tesla’s revenues and a meaningful contributor to the strength of its earnings.

With more traditional car manufacturers moving into the green energy realm, some investors question Tesla’s future.

It generates a considerable chunk of its income from trading regulatory credits to rivals. Thanks to its clean energy status, the government awards it these credits, which it sells to its carbon-producing competitors.

As these rivals become greener, they will be less reliant on purchasing the credits, and Tesla’s income will decline.

Courtesy of Tesla, Inc.

A volatile stock

The Tesla share price lies 28% below its 52-week high and 135% above its 52-week low. According to Koyfin data, analysts have a 12-Month Average Target of $659, which offers around 2.4% upside.

But some analysts are considerably more bullish. Goldman Sachs (NYSE: GS) has put a price target of $860 on the stock. It believes higher pricing and increased sales volume will give it a welcome boost.

Momentum is Tesla’s friend, and many traders love to speculate on its notorious volatility. If it delivers impressive Q2 earnings, it’s sure to enjoy another share price rise.

The Bitcoin burden

Tesla controversially invested in Bitcoin at the beginning of the year, with a $1.5 billion purchase. It also began accepting Bitcoin in payment for vehicles.

The company about-turned on this decision in May and angered many crypto enthusiasts by selling off 10% of its Bitcoin before Q1 earnings to boost its profits with a $101 million gain.

Q2 may show it’s sold off more Bitcoin, but the number one cryptocurrency has been going through a bad patch.

Photographer: Dmitry Demidko | Source: Unsplash

The price of Bitcoin is down 45% in the past three months. Therefore, Tesla may take a sizeable hit due to its declining value. The Financial Accounting Standards Board (FASB) designates Bitcoin as an “indefinite-lived intangible assets,” meaning any loss, even a brief one, will incur an impairment charge.

The volatile nature of Bitcoin makes this a highly speculative investment for anyone but particularly risky for such a prominent business.

Tesla share price vs Bitcoin price

Tesla share price vs Bitcoin price – Source: Yahoo Finance

A unique and perplexing story

The Tesla story is a unique and perplexing one. Investor optimism has driven its share price skyward repeatedly, with accelerating speed in recent years. But this can only go on for so long, and eventually, the fundamentals must match up, or the share price will plummet.

Either that or Tesla reveals an incredible new money-spinning avenue to explore.

There’s Morgan Stanley’s recent revelation that flying Tesla cars are likely at some point (when is less clear), and CEO Elon Musk claims it’s very close to achieving Level 5 self-driving technology.

Both flying and self-driving cars conjure a futuristic idealism many tech enthusiasts have dreamed of for decades. It’s already embracing the futuristic vision with its Cybertruck design.

Tesla Cybertruck – Courtesy of Tesla, Inc.

Tesla is not immune to criticism. Battery fires haunt the company, and its journey into China is fraught with difficulty.

Meanwhile, the company has rising competition globally, and its regulatory credits business is on the decline.

Even more worrying is Elon Musk recently admitting to hating his position as Tesla CEO:

“I rather hate it and I would much prefer to spend my time on design and engineering, which is what intrinsically I like doing.”

Considering his sway on the stock price – it’s clear many diehard investors are investing in the man rather than the business – the risk of Elon Musk leaving could cause the mother of all share price declines.

There’s no reason to think that will happen; he seems utterly invested in continuing to steer Tesla to greatness.

Sometimes people think it is performance, but safety is always the primary design requirement for a Tesla

— Elon Musk (@elonmusk) June 25, 2021

Elon Musk says safety is the primary design requirement for a Tesla

Regardless of its controversial leader, highly speculative nature, and tribal following of Tesla supporters, the stock is undoubtedly expensive.

It has a $620 billion market cap, its price-to-earnings ratio is a whopping 649, and it doesn’t offer a dividend.

Furthermore, a more expansive market pullback is something all investors need to keep in mind. The rise of the Covid-19 Delta variant is causing fear to spread once more, and inflation is another ongoing concern.

Traders will no doubt continue to enjoy speculating on Tesla stock around earnings season. Still, long-term investors must take a more cautious approach to getting involved in this controversial EV stock.

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Topics:
Quarterly Earnings
Automobile Manufacturers
Electric Vehicles
Industries:
Consumer Discretionary
Companies:
Tesla

Author: Kirsteen Mackay

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Kirsteen Mackay does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Kirsteen Mackay has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.