Tesla Earnings: Were You Disappointed?
Earlier this week, Tesla (NASDAQ: TSLA) reported its earnings for the second quarter and if you follow the stock, you know what happened. Shares of TSLA fell by 10% following the report, taking the air out of a recent multi-month rally. The NASDAQ as a whole pulled back a bit this week as we also saw a sell-off after the earnings report from Netflix (NASDAQ: NFLX). So are we in for some more downside risk with Tesla?
The earnings report itself was fine. The company topped Wall Street estimates on the top and bottom lines, setting a new record for quarterly revenue and vehicle deliveries. Most Tesla investors were focused on the company’s margins though after multiple price cuts to its vehicles. In a non-recessionary environment, demand for Tesla vehicles was through the roof. Even though Musk reiterated that demand is strong, the price cuts lead us to believe otherwise.
Margins fell to just 9.6% this quarter, which puts it more into automaker territory than tech behemoth. This is where the valuation concerns come in. What really sets Tesla apart from other automakers? Every electric vehicle comes with technology now and demand for other EVs is starting to pick up. Try driving down the street these days without seeing a few Rivians (NASDAQ: RIVN).
But it wasn’t just margins that had Tesla bulls troubled. The company also noted that due to factory upgrades, we could potentially see a dip in production for the third quarter. Less production will lead to lower revenues and deliveries, which means that it won’t just be margins that are on the decline.
It’s Not All Bad News
That was a lot of negative news, I almost started to sound like a Tesla bear! On the call, Musk claimed that the company is in early discussions with a major OEM to license its FSD or Full Self Driving software. This was an interesting point as up to now, many believed FSD would only be used in Tesla vehicles. If the company can make recurring revenues from other automakers, that would be a high-margin revenue stream.
Tesla is also set to begin production on the Cybertruck this year as well as continuing to build up its Supercharger network. The company has reached partnerships with a long list of automakers in North America who will begin to exclusively use Tesla’s chargers. Finally, it was another quarter of triple-digit growth for its energy division. As this segment continues to grow it will put less pressure on the automotive revenues to carry the business.
So are you taking the bull or bear side from Tesla’s earnings? I believe the short-term sentiment has flipped bearish. We saw a gap fill at the $263 price level and there are still a couple more below, notably at about $235 and even down to $190. Do we hit those levels over the next quarter or two? We very well could. I’ll be targeting those levels as entry points for the short-term future. Long-term I am still bullish on the stock, but the declining margins are a concern and I’d like to see price raises as global economies regain their strength.
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