Tesla’s Q2 Earnings: Can Record Deliveries Drive Profits?

Tesla’s Q2 earnings are expected after the markets closes on Wednesday. Tesla’s (TSLA) announcements tend to generate a lot of fanfare. Apart from the company’s second-quarter earnings and other business updates, CEO Elon Musk’s tweets keep investors on their toes. Tesla has outperformed mainstream automakers like Ford (F) over the last few years. So far, 2019 is turning out to be a tough year for the stock. Tesla has lost 23.2% in 2019, while Ford has seen an upwards price action of 37.4% this year. NIO (NIO) has lost almost 47% year-to-date.

Tesla’s Q2 earnings 

The analysts polled by Thomson Reuters expect Tesla to post revenues of $6.4 billion in the second quarter. The company posted revenues of $4.5 billion in the first quarter and $4.0 billion in the first quarter of 2018. Analysts expect Tesla’s second-quarter revenues to rise more than 60% on a YoY (year-over-year) basis. Tesla reported record deliveries in the second quarter. The deliveries will likely drive its revenues in the second quarter. The company delivered 95,200 cars in the second quarter—a rise of 134% YoY. Tesla’s car deliveries rose 51% on a sequential basis.

Musk has had a tumultuous relationship with bears. Last month, during Tesla’s annual meeting, Musk denied reports that Tesla is facing demand issues. Musk added that Tesla has “a decent shot at a record quarter on every level. If not, it’s going to be very close, but we’ve got a shot at a record quarter.” With Tesla’s second-quarter deliveries beating the expectations and setting a new record, Musk seems to have kept his promise. While the company’s revenues might rise exponentially in the second quarter due to record deliveries, markets might watch other metrics.

Cutting costs

During the second quarter, Musk sent out an email to employees that hinted at broad-based cost cuts. In the email, Musk said, “Going forward, all expenses of any kind anywhere in the world, including parts, salary, travel expenses, rent, literally every payment that leaves our bank account must (be) reviewed.” While Tesla’s revenues and deliveries have been rising steadily, sustainable profitability has been elusive for the company. Tesla has been public for nine years, but it has only delivered net profits in a few quarters.

Tesla posted a net loss in the first quarter. The company reported an adjusted net EPS of -$2.90 in the first quarter. The losses were wider than analysts’ expectations. Looking at Tesla’s Q2 earnings estimates, it’s expected to post an adjusted loss per share of $0.43 in the second quarter. However, analysts expect Tesla to deliver a net profit in the third and fourth quarter.

What could drive Tesla’s profitability?

The big spike in deliveries and the focus on cutting costs are positive drivers for Tesla’s Q2 earnings. Notably, rising production levels help drive efficiency and bring down the per-unit fixed cost. However, we also need to look at Tesla’s product mix. In the second quarter, Model 3 accounted for over 81% of Tesla’s deliveries. The same figure was 45% in the second quarter of 2018. Incidentally, the combined deliveries for Model S and Model X actually fell YoY in the second quarter. The cheaper priced Model 3 is expected to have lower profitability compared to Model S and Model X.

What to watch for on Tesla’s Q2 earnings call 

Some analysts have raised concerns about Tesla’s profitability and margins. The company also slashed some car prices earlier in July. During Tesla’s Q2 earnings call, markets will watch Musk’s comments on margins. After shattering delivery projections in the second quarter, Tesla might revise its 2019 delivery guidance. Tesla plans to deliver 360,000–400,000 car units in 2019. In the first half of 2019, the company delivered 158,219 cars.

Analysts don’t see Tesla stock moving much higher from these levels. The stock has received a mean consensus target price of $263.55, which represents a potential upside of 3.1% over its closing prices on Monday. NIO’s target price implies a potential upside of almost 54%. Tesla has received mixed ratings from analysts. The stock has received a “buy” or higher rating from ten analysts, while 13 analysts recommended a “sell” or lower rating. The other nine analysts polled by Thomson Reuters on Monday recommended a “hold” or equivalent rating.