Tesla (NASDAQ:TSLA) delivered its Q2 earnings after the markets closed on Wednesday evening and the results weren’t pretty. After the company reported a worse than expected loss and the departure of its Chief Technology Officer (and co-founder), TSLA plummeted 13.6% on Thursday. That’s the worst single-day performance for Tesla stock in 2019.
It’s not simply that the company lost money again that has investors concerned. It’s the fact that TSLA lost a lot of money despite record sales volume.
TSLA Stock Hammered by Q2 Earnings
Tesla opened its Q2 earnings report with some positives.
The company delivered a record 95,356 vehicles in the quarter, with a production volume of 87,048. Those numbers shattered the company’s previous high mark of 91,000 and 86,600 units respectively, which it recorded in Q4 2018. A quarter where the company reported a profit.
Tesla also noted that it is on track to launch its Shanghai Gigafactory by the end of this year and that the Model Y is expected to arrive in showrooms by fall of 2020. TSLA churned out Model 3s during the quarter, delivering 77,634 units with an average selling price in the $50,000 range. The company also generated $614 million of cash flow during the quarter.
This all sounds pretty good, but then came the bad news. Despite record deliveries, Tesla lost $408 million, or $1.12 per share. That’s far worse than the 31 cent loss analysts were expecting. Margins for its automotive business fell to 18.9% from 20.6% a year ago. And in the earnings call, TSLA CEO Elon Musk shocked investors with the news that CTO and Tesla co-founder J.B. Straubel is stepping down from the role he has held since 2005. He will remain with the company as an advisor.
The results of the Q2 earnings were felt immediately. Tesla stock closed at $264.88 on Wednesday, but by the time the markets closed on Thursday, TSLA stock had dropped to $228.82 for a 13.6% loss on the day.
Is the TSLA Stock Drop a Buying Opportunity?
One reaction to the huge drop in TSLA stock would be to look at it as a buying opportunity. After all, the company is now churning out cars in volume. It’s preparing to ramp up production for the Chinese market, where car sales finally increased after a year of decline — to the benefit of electric car makers like China’s Nio (NYSE:NIO) as well as Tesla.
However, to TSLA bears, there were some big red flags in that earnings report.
As Business Insider notes, Tesla’s entire plan for sustained profitability is now in question. According Elon Musk, the plan is to get the Model 3 into mass production, and to have it available starting at $35,000 to capture mass market adoption. When Model 3 production began to ramp up last year and the company strung together two straight profitable quarters, it looked like that plan was bearing fruit.
However, in Q2, the company sold a record number of Model 3s. The average selling price of those cars was around $50,000. The fact that the company still lost $408 million raises doubts about whether it could ever be profitable by selling a $35,000 car. Even at its current premium price, the Model 3 doesn’t have high enough margins for TSLA to make money.
Finally, there’s the departure of Straubel. He has been seen as the second-most important person at the company, after Elon Musk. His departure from the CTO role has rattled many investors. Adding to the cloud over Straubel’s departure is the news that he sold $30 million in TSLA stock since November 2018. That raises the question of whether he has lost confidence in the company.
For the record, Elon Musk says his company should probably break even in Q3 with a return to profitability in Q4. Based on the performance of Tesla stock on Thursday, it seems like many investors aren’t buying that.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.