Where next for Tesla stock as it eyes record-breaking H2?

Tesla Q2 earnings beat forecasts

Tesla managed to deliver strong double-digit growth in both sales and profits during the second quarter despite facing supply chain problems and Covid-19 disruption in China while finding it difficult to ramp-up its new factories in the US and Germany.

We already knew ahead of the results that Tesla delivered 254,695 vehicles in the period, missing forecasts and plummeting from the record 310,048 vehicles shifted in the first quarter. Still, deliveries were up some 27% from the year before.

The result was a 42% rise in revenue from last year to $16.9 billion in the second quarter, coming in shy of the $17.2 billion pencilled-in by analysts. However, that was down almost 10% from the first, bringing an end to consecutive quarters of record sales that it has consistently delivered over recent years.

Adjusted EPS at the bottom-line jumped 57% to $2.27 and smashed Wall Street’s $1.85 estimate, but again this was lower than what was reported in the first quarter. Higher selling prices, an improved contribution from its non-automotive segments and lower stock-based compensation all contributed to the improvement in earnings from last year.

Notably, profitability was squeezed dramatically in the second quarter. Its automotive gross margin came in at just 27.9%. That contracted from 28.4% the year before and from the record 32.9% reported in the first quarter. Although Tesla has hiked prices, it is also dealing with rising costs for batteries and other components, while weaker utilisation rates in China and at its new factories also dragged down profitability.

Tesla promises ‘record-breaking’ second half

Tesla chief financial officer Zachary Kirkhorn said Tesla was still hoping to grow deliveries by 50% this year, suggesting they should top 1.4 million in 2022. Tesla said production at its core factories in Fremont and Shanghai are at record levels, while the problems ramping-up output at its new sites in Austin and Berlin are also starting to be ironed out and adding fresh capacity.

The primary reason for the sequential drop in deliveries in the second quarter was the Covid-19 disruption suffered in China, which forced Tesla to temporarily close its plant in Shanghai. However, it swiftly recovered once lockdown rules eased and the plant delivered record production numbers in June, and this should continue to improve going forward now that Tesla has upgraded some of its equipment.

Output should also improve at Fremont following record production in the quarter after Tesla made some adjustments that will allow the factory to continue making cars regardless of whether its new batteries or legacy ones are available.

Growing and maximising capacity is key, considering CEO Elon Musk said Tesla’s ‘problem is overwhelmingly that of production’. Although he signalled that some demand had dropped off, he said the company has ‘so much excess demand that it’s not an issue for us’, while Kirkhorn said any drop in demand was ‘not material’.

Tesla has not provided any firm delivery target for this year, but would need to produce around 836,555 vehicles in the second half to hit the 1.4 million forecast pencilled-in by Wall Street. Analysts believe Tesla can produce a record 375,723 vehicles in the third quarter and another all-time high of 444,342 cars in the fourth.

Musk said Tesla should exit 2022 with production running at an annualised run-rate of around 2 million vehicles, suggesting it can continue to pursue its goal to grow annual deliveries by 50% in 2023 as its new factories come online.

Tesla’s new factories start to ramp-up

The company opened a new factory in Berlin, Germany, back in March to mark its first site in Europe and that was swiftly followed by the launch of another plant being opened in Austin, Texas in April. However, supply chain constraints and other issues such as a trouble securing labour have made it difficult for both sites to swiftly scale-up. At one point, Musk warned both sites were burning through billions of dollars as a result.

Tesla said that its new site in Germany has managed to produce 1,000 cars in a single week since opening and delivered a positive gross margin in the second quarter. It said production should ‘continue improving through the rest of the year’. Meanwhile, the first deliveries have been made from Austin, suggesting the improvements are taking slightly longer here, with the site set to hit the 1,000 cars-a-week milestone sometime over the next few months.

Both factories are key to unlocking the next phase of growth at Tesla, as well as scaling up to make Tesla more efficient and profitable.

Elon Musk also confirmed that its new models and projects are still in development, although we could see them introduced at a slower rate as it focuses on ramping-up its new sites. The long-awaited Cybertruck, which has already faced several lengthy delays, should be introduced in the middle of 2023.

Tesla has almost $19 billion in cash

Elon Musk sparked fears last month when he mentioned the threat of bankruptcy as its new factories swallowed up cash, but the strong recovery following a troubled start means Tesla was able to withstand the pressure. Tesla ended the second quarter with $18.9 billion in cash, cash equivalents and securities that can be sold off at short notice. In fact, that actually increased from $18 billion at the end of the first as it continued to generate cash.

Tesla sells bitcoin

Tesla also announced that it converted 75% of its bitcoin holdings during the quarter into fiat currency, bolstering the balance sheet by some $936 million. Tesla bought $1.5 billion of bitcoin back in February 2021 and then sold off 10% of that two months later. Its holdings are now worth just $218 million and the loss made in the quarter weighed on the bottom-line. Musk said the sale was to help maximise cash given the uncertain environment but stressed it should not be treated as ‘some verdict on bitcoin’.

Where next for TSLA stock?

Tesla shares were in consolidation mode ahead of the earnings, and we could see the stock breakout now that markets have digested the update. The stock is up 1.7% in extended hours trade today at $755.

Shares need to move above $775 to break through the current ceiling and can then bring the 100-day moving average at $828 into the crosshairs. The 44 brokers that cover Tesla remain bullish on the stock with an average target price of $886.70, implying there is over 19% potential upside from current levels over the next 12 months. Notably, trading volumes have dipped over the last five days as the stock has pushed higher but there was a notable uptick yesterday – coming in-line with the 100-day average – to suggest volumes could increase post-results and provide some momentum. The RSI is in neutral territory but trending higher.

On the downside, the 50-day moving average at $712 should be treated as the initial floor but any renewed pressure could see the stock swiftly fall to the $666 floor that has been in play since the end of June. The one-year low at $620 should be regarded as the ultimate level of support for the time being.

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