Tesla's Q2 Performance: Challenges, Opportunities, and Future Prospects

Tesla Q2: The Bottom Is Likely In (NASDAQ:TSLA)

Tesla, Inc. (NASDAQ:TSLA) sold off heavily after earnings as it missed EPS estimates, margins weakened, and the robotaxi event was delayed. However, while YoY growth was negative, we've seen an improvement in QoQ in automotive revenues and energy deployment doubled on a sequential basis. Despite a sharp sell-off, we are still up a solid 50% from the lows back in April and if you ask me, the evidence says that a bottom is in. And I mean a bottom in terms of revenue, margins and stock price. Q1 was Tesla's low point, which was reflected in the stock's valuation, but I expect both Tesla's core business and AI initiatives to trend upwards from here. In my last article on Tesla, I discussed the risks associated with increased financing needs. However, this risk seems to be smaller now as we have seen a reversal in margins and revenues. On the other hand, we are coming closer to fulfilling Musk's AI dream, and while this is still a long shot, I believe it is one we can now take with a certain margin of safety. Teslas' auto revenues fell 7% YoY, while services grew 21% and energy generation and storage increased 100% YoY. However, operating expenses were notably higher, up 39%, and this took a toll on the company's operating margin, which came in at 6.3%. Adjusted EBITDA fell by 21% YoY and while there was a sequential increase, the margin was slightly lower than in Q1. If you ask me, there's something for both bulls and bears here. Clearly the auto business has not delivered its promises from a few years ago, but to be fair, the whole EV adoption has been underwhelming. On the other hand, service revenues and energy revenues are growing at a fast click, now representing over 25% of Tesla's total revenues. Now, in terms of cash flow, which is an issue I talked about in my last post, we have seen Tesla's operating cash recover to its previous levels, and it has grown YoY. The company is investing a lot more money due to AI, but it has also raised enough cash to counter this. For now, with cash and equivalents of over $15.3 billion, there is no immediate risk to solvency. Of course, Tesla has been redefining itself as an AI company for some months now, so it's important to look at the latest updates on this, namely, FSD/robtaxi initiative and the Optimus. It's difficult, obviously, my predictions on this have been overly optimistic in the past. So I mean, based on the current trend, it seems as though we should get miles between interventions to be high enough that -- to be far enough in excess of humans that you could do unsupervised possibly by the end of this year. I would be shocked if we cannot do it next year. Source: Earnings Call. At least Musk is self-aware enough to realize that he has been overly optimistic. Still, he believes that FSD will be a thing at the very latest by next year. This will power Tesla's fleet of robotaxis, which Tesla will showcase on October 10th. Although the numbers sound crazy, I think Tesla producing at volume with unsupervised FSD essentially enabling the fleet to operate like a giant autonomous fleet. And it takes the valuation, I think, to some pretty crazy number. ARK Invest thinks, on the order of $5 trillion, I think they are probably not wrong. And long-term Optimus, I think, it achieves a valuation several times that number. I think everyone on earth is going to want one. There's 8 billion people on earth, so it's 8 billion right there. Then you've got, all of the industrial uses, which is probably at least as much, if not way more. So I suspect that the long-term demand for general purpose humanoid robots is in excess of 20 billion units. Source: Earnings Call. Musk believes long-term demand for robots like Optimus could reach 20 billion units. Of course, even if Tesla doesn't serve the whole market, it is still a huge number. According to Finxter, at a $20,000 price with a billion units sold, this would push revenues to $20 trillion. Analyst estimates suggest the robotics industry could achieve a market size of over 270 billion by 2032. Musk is perhaps overly optimistic, but to be fair, that's certainly at least part of his job. In any case, there's no shortage of potential catalysts. Reality will likely fall short of Musk's lofty expectations, but even then, we could be looking at an entirely different Tesla in 2-3 years. Already, 25% of revenues are not coming from auto sales. Investing in Tesla for the AI potential is not completely crazy, but it is certainly speculative. Nonetheless, I think there's a good argument to be made that we have seen a bottom in revenues, margins and the stock price. This means we can invest in Musk's AI dream with a certain margin of safety. This is not to imply that we will see revenues grow at double digits starting tomorrow, but the worst may be behind us On a TTM basis, we actually saw revenues plateau in 2023, and actually decrease by over 8% in Q1 of 2024. But, we have already seen a return to growth in Q2, and this should continue to improve. Back in 2023 the company was facing issues as they geared up for the production of the Cybertruck, but both Cybertruck and Model 3 are ramping up. Furthermore, we are also seeing a return to growth in terms of BEW adoption. Then we have the energy business, which will be set to double/triple when TSLA finishes building the megapack factory in China For the energy business, this is growing faster than anything else. This is -- we are really demand constrained rather than production constrained. So we are ramping up production in our U.S. factory as well as building the Megapack factory in China that should roughly double our output, maybe more than double -- maybe triple potentially. Source: Earnings Call. And of course, Service revenues continue to grow at a fast-click. Investors are also worried about profitability, but fundamentals also seem to suggest that margins should improve from here. GAAP operating and gross margins have already increased in the last quarter. Auto margins have been helped through higher tax credits in the last quarter. However, the truth of the matter is that even without these improvements, we should see overall margins for Tesla increase as the share of revenue begins to shift towards energy, services, and other AI initiatives. Energy generation already boasted a higher margin than auto since 2023 and while there's still work to do, I believe service revenues should eventually have a higher margin too, especially as the company perfects it FSD. Technically speaking, we've established a strong uptrend, and this means a low could be in place. Tesla went as low as $140 back in May but has since bounced back over 50%. Since then, we've seen the 20 EMA cross the 50 EMA, and both have now exceeded the 200 EMA, which is presently acting as support for TSLA. It's also worth noting that back in May, TSLA's P/E dipped to around 40. While this could still be considered high, it was well below the company's 3 and 5-year median P/E. In my opinion, Q1 2024 was a perfect storm for Tesla, and investors were pricing in the worst. Now, it seems like the worst could be behind us, and while the company still faces challenges, investor confidence may soon begin to come back. In conclusion, I believe that the worst-case scenario was priced into the stock a few months ago, and the latest earnings show at least a change in the trend. Overall, I think we should begin to see Tesla's revenues keep growing while margins improve. For this reason, I am upgrading this to a Buy.

Tesla Q2: Developing A Moat In Optimus & Autonomy (NASDAQ:TSLA)

Total revenue: $25.5B, exceeding the analyst expectations of $24.8B. Earnings per share: $0.52, falling short of the analyst expectations of $0.62. Here are two highlights from the earnings call, which I have identified: ...the biggest differentiator for Tesla is autonomy... ...while others are pursuing different parts of the AI robotic stack, we are pursuing all of them. - CEO Elon Musk, Q2 2024 Earnings Call ...we've begun the journey towards the next phase for the company with the building blocks being placed. It will take some time, but will be a rewarding experience for everyone involved. - CFO Vaibhav Taneja, Q2 2024 Earnings Call In my opinion, Q2 results were disappointing for short-term Tesla investors; for long-term investors, it arguably ironically opened more of an opportunity, as the shares dropped 13.25% post-results. The reason I say this is that my long-term thesis on Tesla is related to its moat in autonomy primarily, and in this analysis, I will review what management revealed in Q2 earnings is in store for long-term TSLA shareholders. First of all, I have mentioned in my previous analyses on Tesla that FSD licensing could be part of the moat that Tesla develops, but analyst Alex Potter was quite strong in the earnings call, in my opinion, in raising a question on the constraints that this FSD licensing strategy could face in the near term, as well as elucidating the fact that this potentially might not be one of the most lucrative elements of TSLA, at least for now. That being said, in terms of long-term benefits, I think Tesla's moat in FSD will be hinged on its AI software; while this is difficult to implement in third-party automobiles in the near future, I think Tesla has the capability of developing this to be third-party adaptable, as well as OEMs developing cars in the future that suit and fit Tesla's AI. However, Musk also stated third parties would have to adopt Tesla's FSD software on a large-scale to make it worthwhile to them; otherwise, they could just build the cars themselves and add them to the Tesla network. So, I think this FSD software licensing will come at a premium to OEMs, and it will be very difficult to compete with Tesla's cheaper models. ...There are a few major OEMs that have expressed interest in licensing Tesla full self-driving. And I suspect there will be more over time... ...given the speed at which, the auto industry moves, it would be several years before you would see this in volume... ...the kind of deals that are obviously relevant are only if, some OEM is willing to do this in a million cars a year or something significant. - CEO Elon Musk, Q2 2024 Earnings Call Furthermore, in the earnings call, Musk was very bullish about Optimus, which is arguably an area of Tesla I have not given enough consideration. I think it is very compelling to see the CEO of what is commonly known now as a car company, which for insiders is an AI company, state that its long-term future is likely to be in humanoid robots. This is a bold statement, but it is one that I think could work out for Tesla as part of its evolution into an autonomous company rather than an advanced clean-energy car company. ...Optimus is already performing tasks in our factory... ...in 2026 we'll be providing Optimus robots to outside customers... ...as I've said a few times, I think the long-term value of Optimus will exceed that of everything else that Tesla [does] combined... ...just simply consider the usefulness utility of a humanoid robot that can do pretty much anything you ask of it. I think everyone on earth is going to want one. There's 8 billion people on earth, so it's 8 billion right there. Then you've got, all of the industrial uses, which is probably at least as much, if not way more. So I suspect that the long-term demand for general purpose humanoid robots is in excess of 20 billion units. And Tesla... ...has the most advanced humanoid robot in the world, and is also very good at manufacturing, which these other companies are not. And we've got a lot of experience -- with the most experienced with the world leaders in real world AI. - CEO Elon Musk, Q2 2024 Earnings Call There is a wide range of use cases for humanoid robots, and one case study that comes to my attention is in agriculture. In this field, the adoption of autonomous robots is expected to take 5-10 years because it will likely take some time and gradual adoption before these technologies are utilized at scale. In my opinion, the first industries and companies to begin to utilize these technologies will see very strong financial results and have a great competitive advantage. It is likely that Tesla will develop a significant moat in the market for humanoid robots based on scale and AI with Optimus, so it is another reason to be bullish about TSLA for the long term. This idea of widespread adoption of autonomous humanoid robots is integral to the long-term thesis held by many big tech companies at the moment and shared by investment professionals like myself and Cathie Wood of ARK Invest. The reason to allocate to big tech companies is, in my opinion, hinged on the thesis that these autonomous technologies are likely to drive significant deflationary effects in the economy through radically higher levels of production and cheaper costs of manufacturing possibilities. Tesla is positioned and is consolidating itself as one of the integral linchpins in this autonomous technology network, and so I think, despite the concerns with the valuation, one is very mistaken if they consider Tesla as just a car company. As a result of the economies of scale and pricing strategies that Tesla is likely to be able to command due to its moat in autonomous networks and robot provision, I think it is quite likely that the valuation for Tesla expand significantly. Musk mentioned in Q2 that he thinks ARK Invest's $5T+ market cap prediction for TSLA is achievable, and furthermore, he envisions this could become much higher with Optimus deployed at scale commercially and internally. This is very exciting, and it arguably places Tesla central to a profound economic revolution that could be sparked by autonomous technology. In other words, this narrative, grounded in moats, economies of scale, and AI infrastructure, is very real and very investable. What I think a lot of the short sellers and a lot of the traditional value investors have missed is the macroeconomic value creation Tesla may be fundamental to over the long term. However, it is key that TSLA investors remember that it could be a very long term, and I think holding Tesla for 10+ years is the only strategy that makes sense if investing in the stock for autonomy growth and expanding market sentiment as a result of this because I truly see Tesla as positioning itself to be enduringly committed to this goal. Selling for short-term stock price movements would likely miss out on the untimeable exponential growth possible from this stock based on autonomy over the next few decades. Like Alphabet (GOOGL) (GOOG), Amazon (AMZN), Nvidia (NVDA), and others, TSLA is unlikely to stop expanding over the long term as a result of the extraordinary benefits this Western technology infrastructure could have on global economics. Unlike Nvidia, Tesla has had an extended period recently of deflated valuation compared to previous highs, so I think it has presented an excellent buying opportunity. On the other hand, NVDA is at its limit in terms of valuation, so I would see it as potentially quite shrewd to take capital from NVDA and put it into TSLA for now. Once Nvidia's valuation is more reasonable again, which I think could be around 2026/2027, Nvidia would arguably become a Strong Buy again. In terms of the robotaxi network, Musk and the Tesla team spoke quite openly about this in the Q2 earnings call, and one area that stood out to me is that Tesla's FSD is programmed to be able to be deployed anywhere, even on a planet that no car has ever driven on -- given the way Tesla's FSD is trained, it can drive based on spatial awareness and with similar cues to humans. This is much more advanced than Waymo's model, which requires pre-structured mapping of an environment to guide its sensor-based approach. Travis Axelrod, Tesla's Head of IR, also outlined how this could give faster regulatory approval across states. However, this is one area that Tesla is going to have to work patiently on to convince the regulators that Tesla's FSD is ready to be deployed fully autonomously. From the data, it is becoming very evident that autonomous transport is going to be much safer than human-operated transport. ...in terms of regulatory approval, the vehicles are governed by FMVSS in U.S., which is the same across all 50 states. The road rules are the same across all 50 states. So creating a generalized solution gives us the best opportunity to deploy in all 50 states, reasonably. - Head of IR, Travis Axelrod, Q2 2024 Earnings Call Furthermore, Musk gave a very insightful analogy that Tesla's autonomous network would work like Airbnb (ABNB) but for cars. I think this is a clever way to view the future autonomous vehicle market for Tesla in the medium term to long term. However, I also think that as it scales its operations, it is likely to find itself more involved in fleet development, and I think the very long-term future of Tesla is likely to be mainly autonomous vehicles that are not co-owned with customers but fully owned by Tesla. I think this will happen as the economies of scale and pricing advantages of autonomous vehicles deter vehicle ownership and potentially create a majority of the public who do not own a car but opt for autonomous taxis, particularly in cities. You just literally open the Tesla app and summon a car and resend a car to pick you up and take you somewhere... ...you can think of the giant fleet of Tesla vehicles as like a giant sort of Airbnb equivalent fleet, Airbnb on wheels... ....this would all be a Tesla network. And there's an important clause we've put in, in every Tesla purchase, which is that the Tesla vehicles can only be used in the Tesla fleet. They cannot be used by a third-party for autonomy... ...The entire Tesla fleet basically becomes active. This is obviously maybe there's some number of people who don't want their car to earn money, but I think most people will. It's instant scale. - CEO Elon Musk, Q2 2024 Earnings Call In my analysis last week on Tesla, I outlined that I have a 2029 price target of $1,050. I retain this view following earnings, as not much has changed about my thesis. However, over the longer term, I think I have underestimated the effect Optimus could have on Tesla's valuation expansion and fundamental growth, especially as it gets implemented in industrial use cases at scale around the world. However, this is not likely to happen in the near term or even in the medium term, so I think we are looking at a potentially volatile road to $1,050 per share and then a protracted and also volatile period beyond that when robotaxis starts to become deployed at scale, and then Optimus begins to be sold more readily. However, adoption may not be as fast as Musk wants, and the notion that everyone would want an Optimus (8B people, as noted by Musk) is likely an exaggeration. Given that a significant portion of the global population still does not have access to dishwashers, it could be 50+ years before that entire personal-use market is even close to fully tapped for Optimus, if ever. In my opinion, Musk underrepresented the industrial use cases for Optimus in the Q2 earnings call. I think Tesla would benefit from a heavier emphasis on industrial use cases, including Optimus model iterations to support autonomous operations in different industries. I think this could be a big market, but the road to adoption, usability, and deployment at scale is likely to be costly, so Tesla will need to focus again on efficiency internally and continue to focus on moat consolidation to make the economies of scale pay for the development costs. I think this is likely to create market skepticism over periods, and the earnings miss experienced in Q2 this time is likely to be a recurring theme as Tesla repositions itself operationally. One has to have a full understanding of Tesla's operational direction to be an investor, and even then, it is worth remembering that Tesla is a high-risk investment because of the valuation and the dependency the company has on Musk's vision and direction. I wonder whether the firm would be able to manage if Musk was not at the helm. Tesla and Nvidia have roughly equal valuations based on the PE ratio at the moment, but the big difference is that the fundamental estimates on Wall Street show an increase for TSLA over 5 years from current contractions and a decrease for NVDA over 5 years from current highs. Therefore, based on the effect this is likely to have on investor sentiment surrounding the stocks, I think there is much more of a reason to be bullish about TSLA in the short term to medium term than NVDA. Regardless of this, the valuation for Tesla is still very high, and this means that any unexpected earnings contractions as a result of operational shifts and investments from the company could induce periods of significant downside volatility. This is a primary reason why I reiterate that TSLA works as a high-growth investment but arguably not at a large allocation in an effort to mitigate risk. In Q2, Tesla missed its earnings estimates because it faced potential demand issues, indicated by an inventory build up -- its global inventory rose by about 5,000 vehicles, bringing the total to approximately 150,000 units. Additionally, the company faced production and delivery issues for the new Model 3 at its Fremont factory and experienced supply chain issues at Gigafactory Berlin. Furthermore, the company experienced subpar sales in Europe and only modest production increases in China. Most of these reasons for the miss I am not too concerned about, as I view them as short term, except the note on weaker demand. This is something that I do not see as unlikely for Tesla to continue to face in the near term as inflationary pressures force reductions in demand, but also, as I mentioned above, in the medium term to long term, the cost benefits of its robotaxi initiatives will become more actualized, and demand for Tesla's legacy vehicles is likely to wane. This opens up the need for management to allocate capital effectively during the transition to keep revenues stable amid changes in demand. Management will also need to prepare for large growth that could accrue in robotaxis by ensuring it is investing adequately in advance in elements such as an autonomous fleet to meet demand. The Telsa Q2 earnings call was revealing, and Tesla's management outlined many details of the company's forward-looking operational strategy. The earnings results missed analyst estimates and we should expect more of this in the short term, in my opinion, but long-term Tesla bulls should not be deterred by short-term gyrations in the stock price based on earnings reports. Instead, holding TSLA for the long-term growth that could accrue through its autonomous network, which includes Optimus and robotaxis at scale, is the foundation of my thesis. In my opinion, the reduction in price following the earnings results opens up more of a long-term buying opportunity. While this long-term thesis could take 10+ years to truly play out, this length of a holding period, based on the potential for operational excellence and moat consolidation, is what I look for as an investor. Hence, after management's sentiments in Q2 earnings, I reiterate my Buy rating for TSLA.

Tesla Stock: Delayed Catalyst And Expensive xAI Venture (Downgrade) (NASDAQ:TSLA)

Looking for a helping hand in the market? Members of Beyond the Wall Investing get exclusive ideas and guidance to navigate any climate. Learn More " I initiated coverage of Tesla, Inc. (NASDAQ:TSLA) stock in March 2024, when it was trading at $177.77 per share. Despite the ongoing downtrend at that time, I saw Tesla as an excellent opportunity for a long-term investment. In mid-June, after TSLA sellers failed to push the price below $150 and the company began to deliver the first positive news, I reiterated my "Buy" rating. Until recently, this has been one of my most successful calls, given the time elapsed since the rating was initiated. However, in light of recent events, I believe Tesla stock deserves a downgrade. Although I still believe in the long-term future of the company, I think that TSLA stock will at least go through a consolidation phase in the coming months, with the risk of the stock price falling even further. The reason for this is the poor figures for the last reporting quarter and new uncertainties in the form of a possible cash outflow for Musk's new xAI project. This project is already highly valued, and its growth prospects seem unclear to me given the competition in the market for LLM models. A couple of days ago, Tesla released its Q2 2024 results, beating the consensus revenue forecast by almost $760 million but missing the EPS forecast by $0.10, which was a miss of 16.5%. The last similarly significant EPS miss was observed in Q4 2020, according to Seeking Alpha data: Apparently, Wall Street analysts underestimated two things. Firstly, the growth of non-automotive revenue, which allowed Tesla to show a 2.3% year-over-year growth in consolidated revenue despite a decline in automotive revenue by over 6.5% YoY in Q2. This explains the significant beat on the top line. Secondly, analysts overestimated the company's ability to maintain its automotive gross margin, which dipped to 18.47% in Q2 2024 from 19.22% last year. Since non-automotive revenue still accounts for only about 22% of total sales (up from 14.67% in Q2 2023), and the gross margin in this segment is even lower, it did not help Tesla's overall profitability. Even in the absence of "Restructuring and other" operating expenses this year, total OPEX increased by 39% YoY, leading to a 33.1% YoY decline in consolidated EBIT. Tesla also paid ~22% more in taxes (YoY), and with the weighted average shares outstanding increasing marginally, EPS fell by 46% year-over-year. Against the backdrop of these frankly dismal results, the company delayed its robotaxi event scheduled for August (now rescheduled for October). The excitement around Tesla stock recently, as far as I understand, was based on the expectation of this very catalyst (and the Q2 2024 earnings release, of course). Thus, Tesla stock has lost this catalyst in the medium term (at least for 2 months). While delay possibly signals progress on a legit product, may also reinforce the long and challenging path ahead in commercializing/developing a robotaxi product/strategy. Barclays [proprietary source, July 2024]. Additionally, the market saw a continued weakening of the gross margin, which is a terrible sign. I recall comments from people hoping that the growth of the non-automotive segment would allow the company to justify its high valuation and generally improve profitability. I expected it too, but in the long term. However, as we see today, while this segment is growing rapidly, it is still too insignificant in the overall revenue structure to provide any tangible effect on revenue acceleration. Moreover, the non-automotive segment cannot correct the situation with Tesla's overall GP margins today, since "Energy generation and storage" and "Services and other" have gross profit margins of 24.55% and 6.4%, respectively -- there is no strong advantage over the automotive margin. The situation can change dramatically and quickly only if the "Energy generation and storage" segment accounts for 30% or more of total sales by the end of 2025/26. However, in my opinion, this is very unlikely. However, the main reason for my downgrade today is corporate governance. Just yesterday, Elon Musk announced that he: "will take a proposed $5 billion investment into his artificial intelligence startup xAI to Tesla's board of directors after respondents to a poll overwhelmingly voted in favor of such a decision." Judging by the poll's results, the approval is likely to proceed, so Tesla will have to take out $5 billion and give it to xAI. This seems to me to be a rash move. Yes, Elon Musk mentioned at the last earnings call that "Tesla is learning quite a bit from xAI," but I doubt that the positive effect is significant enough to justify such a large expenditure at such a high valuation. xAI was created in March 2023, and its market cap today is $24 billion. After the new round, xAI will most likely become even pricier, while it effectively brings in $0 in revenue, according to Pitch Book. I'm not saying this is a reckless investment. As a long-term investor in the company, I'd like to see Tesla as a diversified tech leader. However, I don't like the timing and the price at which Tesla investors will have to enter xAI. What if the current valuation of this startup is close to its peak? We're talking about $5 billion, which is equivalent to several quarters of free cash flow for the firm, so I'd not like to see it halved at some point. Competition in the LLM models sphere is growing at an incredibly fast pace. While Tesla managed to become a leader in the EV market due to its status as a "pioneer," in the AI solutions market, it will have to compete against multi-billion dollar annual investments from companies like Google (GOOG) and Microsoft (MSFT). This is an entirely different challenge. For the investment in xAI to pay off, the product must be massively better than its peers, in my opinion, and Tesla may face difficulties with this. In my last article, I wrote that the high valuation of the company is most likely due to the higher margins in the future, full self-driving ("FSD"), and the new AI focus. I believe that the combination of all the above catalysts - margin expansion due to a shift in revenue structure amid layoffs, new affordable model, FSD, and AI focus after Musk finally took control - is precisely what explains the current, still very high valuation of TSLA stock. But today, with the FSD catalyst delayed, questions about margins remaining, and the "new AI focus" set to be realized through an expensive stake purchase in xAI, I'm less confident in the sustainability of current TSLA's multiples. What if margins don't recover as Wall Street expects? How fair is it to expect that TSLA's FY2025 P/E will imply almost no contraction from the FY2023 multiple? These questions force me to look at Tesla's valuation from a slightly different perspective, making me a bit more bearish in the medium term than I was just a month ago. That is why, given the delay in the emergence of a strong bullish catalyst, deteriorating margins contrary to my previous assumptions, and what I believe to be poorly timed investment decisions in xAI, I've decided to downgrade Tesla to "Hold" today. Again, I would like to stress one important thing: I am not a Tesla bear, as it might seem from my reasoning above. I continue to hold my small long position in the company, and I do not intend to sell it in the long term. It's just that, based on what I see today, I will most likely have to buy more at a lower price. Considering the totality of the analyzed factors, the probability of a further decline in Tesla shares in the medium term seems much higher than the probability of their further recovery. So I urge investors to be vigilant and not rush to buy the dip in Tesla stock today.