Tesla (NASDAQ:TSLA) stock investors had another disappointing week last week when the company reported second-quarter earnings. TSLA stock is seemingly only ever one headline away from a huge gain or a major crash. Last week was no exception.
Tesla needs to answer several key questions before investors have a clear view of the future. They didn’t get those answers last week. However, investors that read between the lines in coming quarters may get some very useful information.
Here’s what’s important for TSLA stock moving forward.
Tesla’s Second-Quarter Numbers
The headline second-quarter numbers for Tesla were ugly. Tesla reported an EPS loss of $1.12 on revenue of $6.35 billion. Both numbers were short of consensus analyst expectations of a 40 cent loss on $6.44 billion in revenue.
As expected, cash flow was much better in the second quarter given Tesla’s auto deliveries recovered nicely from a big miss in the first quarter. Tesla reported $614 million in free cash flow in Q2 after shocking Wall Street with a $920 million cash burn in the first quarter.
However, some analysts are skeptical of how TSLA was able to hit its deliveries target in the second quarter. Tesla has been repeatedly tinkering with its vehicle pricing. In addition, the lower-priced Model 3s are gaining an increasing share of Tesla’s overall vehicle mix. Tesla has yet to show it can consistently turn a profit in the Model 3 era.
Investors will be watching vehicle gross margin closely in coming quarters. Tesla has said margins will improve as it scales up Model 3 production. In the first quarter, Tesla reported automotive gross margin of 20.3%, down from 24.7% in the fourth quarter. In the second quarter, automotive gross margin dropped again to just 18.9%.
Guidance Key for TSLA Stock
TSLA stock bulls cheered when the company reported a record 95,200 second-quarter vehicle deliveries earlier this month. However, investors seem to have lost sight of the fact that Tesla had guided for between 90,000 and 100,000 deliveries in the quarter. In other words, its deliveries ended up being essentially in-line with its guidance.
But several analysts have pointed out that it is odd Tesla still hasn’t updated its full-year deliveries guidance. Tesla is still calling for full-year deliveries of 360,000 to 400,000 vehicles. Heading into the third quarter, Tesla had delivered 158,200 vehicles. That means Tesla will need to average at least 110,900 deliveries over the next two quarters just to hit the mid-range of its guidance.
The more likely scenario is Tesla cuts its guidance at some point in the second half of the year.
Tesla management has historically been laughably optimistic when it comes to long-term projections. For example, it seems like Elon Musk made investors more uncomfortable than excited when he claimed earlier this year that Tesla will have over a million robotaxis in operation in 2020.
Tesla must cut its guidance or forge ahead knowing it will likely miss its targets in the second half of the year. Neither option is particularly bullish for Tesla stock.
TSLA Stock Lives or Dies on Demand
Despite the delivery beat in the second quarter, phasing out of the $7,500 electric vehicle tax credit makes it difficult to see rising demand for Tesla vehicles in the second half of 2019.
“With the pull forward from the EV tax credit in the US now in the rear view mirror, the hot button issue on the Street continues to be around what the sustainable demand trajectory is for Tesla looking ahead on the shoulders of core Model 3 success and importantly can this be done with bottom line success,” Wedbush analyst Daniel Ives says.
Demand in the second half of 2019 is going to be driven by one of three dynamics.
The first possibility is that a flood of buyers who don’t care about the $7,500 discount will come out of the woodwork and buy vehicles. The second possibility is that Tesla will be forced to lower prices further to stimulate demand. That path would certainly lead to a further decline in margins. Third, Tesla may not sell as many vehicles.
“We continue to believe that despite the impressive 2Q demand rebound, the ability to hit its aggressive FY19 unit guidance of 360k to 400k will be a Herculean task,” Ives says.
I agree. Tesla almost never hits its long-term financial targets, and I’m betting 2019 delivery guidance will be yet another example. Until the company can prove its long-term financial trajectory is on the right path, it’s extremely difficult to make a case TSLA stock is anything more than a speculative play.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.