Tesla's Q2/2022 earnings review - Is Tesla out of the Covid storm?

Tesla closed the day of 20 July 2022 with a price of $742.50.  Following the earnings, the after-hours price closed at $753.68 (an increase of $11.18, ie 1.51% gain).  Elon Musk has a way of underpromising and over-delivering that goes well with investors.  At this point, I admit that I am an investor in Tesla but crazy car prices in Singapore have forbidden me from becoming a customer.  Taking public transport may be my best contribution towards sustainability and reducing my carbon footprint.  Now, back to the earnings.

With news of China's zero Covid policy in place, the market has factored in the loss of production due to the lockdown.  

This is the summary that was provided by Tesla in its Q2/2022 earnings report (where I have highlighted some of the notable achievements):

While most of the news focused on the lack of production from Shanghai, I am quietly excited by the good news that Giga Berlin has produced over 1,000 vehicles per week.  

In case we have forgotten, Elon has advised in 2019 that solar, energy storage will grow faster than electric cars as per the CNBC news screenshot above (published on 14 Dec 2019).  Thus, it is exciting to learn that Tesla reported the highest solar deployment in Q2/2022 in the last 4 years.  In fact, Tesla has admitted in the earnings that the demand for Solar and battery outweigh their current capacity.  With an ongoing supplies & supply chain challenge, it is quite an operational feat.

With the backdrop of the recent Shanghai lockdown, the start of Giga Berlin & Giga Texas, challenges with supplies and supply chain, let us look into the figures reported during the earnings.

Financial Summary

Observations from the Financial Summary:

• Though there is a dip in total revenue compared to Q1/2022, there is still a robust YoY 43% growth amidst the challenging times.  
• Non-automotive revenue accounted for $1,895 for Q1/2022 and it was $2,332 for Q2/2022. This translates to a 23% growth in non-automotive revenue.  There is good growth for non-automotive business.

As per reported by ZT Corporate in the screenshot above - between 2015 to 2022, the average profit margin for major automotive companies worldwide is about 7.5%.

• Coming to their operating margin of 14.6% - this remains a high watermark for the automotive industry.  
• For operating expenses over the total revenue (as a %), Q1/2022 reported 9.9% whereas Q2/2022 reported 12.1%.  This implied that Tesla incurred more expenses (12.1% in Q2 compared to 9.9% in Q1).  Giga Berlin and Giga Texas require more time for them to ramp up and optimize their production.  Over the next few months, we can expect their production to improve and scale.
• Notably, it is no surprise the Q2/2022 EPS ended up lower than Q1/2022.
• Free Cash Flow (FCF) stood at $621 million, this is much lesser compared to the previous quarter of $2,228 million.
• But the Cash and Cash equivalent have increased from $17,505M to $18,324, a 4.6% increase.  This is a healthy amount of cash on hand.

The following is extracted from Tesla's earnings report about their financial summary accounting for both their gains and concerns:

Revenue

Total revenue grew 42% YoY in Q2 to $16.9B. YoY, revenue was impacted by the following items:

+ growth in vehicle deliveries

+ increased average selling price (ASP) 

+ growth in other parts of the business

Profitability

Our operating income improved YoY to $2.5B in Q2, resulting in a 14.6% operating margin. YoY, operating income was primarily impacted by the following items:
+ increased ASP
+ growth in vehicle deliveries
+ profit growth in other parts of the business
+ lower stock-based compensation expense
- higher raw material, commodity, logistics and expedite costs 
- higher per unit fixed costs in Shanghai due to shutdowns
- negative FX impact
- Bitcoin impairment

Cash

Quarter-end cash, cash equivalents and short-term marketable securities increased sequentially by $902M to $18.9B in Q2, driven mainly by free cash flow of $621M, partially offset by debt repayments of $402M. As of the end of Q2, we have converted approximately 75% of our Bitcoin purchases into fiat currency. Conversions in Q2 added $936M of cash to our balance sheet.

Operational Summary

Observations from Operational Summary:

• Model S/X production and deliveries have improved compared to Q1/2022.  
• Model 3/Y production and deliveries have dropped (due to Shanghai lockdown) compared to Q1/2022.
• We have noted growth in the end-of-quarter operating lease vehicle count from 128,402 to 131,756, a growth of 2.6%.
• Thus, in the total production and total deliveries, the market has anticipated a drop:
• For total production, it fell from 305,407 (Q1) to 258,50 (Q2), a drop of 15.7%.
• For total deliveries, it fell from 310,048 (Q1) to 254,695 (Q2), a drop of 17.8%.   
• Given the challenges of the pandemic and supply chain, it remained encouraging that Tesla still managed to deliver and produce in such volume.
• Personally, it would be interesting to see how the rest of the market copes with their production and delivery when they announce their earnings.
• Coming to global vehicle inventory in days of supply, Tesla reported 4 compared to 3 reported in the last quarter.  Days of supply is calculated by dividing new car ending inventory by the relevant quarter’s deliveries and using 75 trading days (aligned with Automotive News definition).
• For Solar deployed (MW), we saw good growth from 48 (Q1) to 106 (Q2), a remarkable 120.8% growth.
• For Storage deployed (MWh), we saw growth from 1,372 (Q1) to 1,453 (Q2), an encouraging growth of 5.9%
• For supercharger stations, we saw growth from 3,724 (Q1) to 3,971 (Q2), a growth of 6.6%.
• For supercharger connectors, there is a growth from 33,657 (Q1) to 36,164 (Q2), a growth of 7.4%
• Personally, we will need a good distribution of supercharger stations and supercharger connectors so that Tesla drivers will be able to charge at will.  This is important for a wider adaptation of the Tesla ecosystem.

• From the table above, Tesla will be on track to produce over 1,900,000 units of Model S/3/X/Y annually.  Though it will take time for new Giga Berlin & Texas to ramp up their productions, we should see greatly improved productions in the next few quarters.
• Tesla explained the limitations to operating their factories at full capacity due to manufacturing challenges related to the Covid shutdown, supply chain disruptions, labour shortages, logistics and other complications.
• Giga Shanghai was shut down fully first and later partially over Q2, leading to the drop in production.
• For Giga Berlin, it was reported that they have produced over 1,000 vehicles per week - a good start as they seek to improve over the rest of the year.
• We note that Tesla continues to gain market shares in US/Canada and China.  However, Europe's market share seems to be stagnating. This could be due to Shanghai's production and thus can be deemed as a one-off situation.

• As per the news extracted on 21 July 2022, there are concerns that Shanghai may enter another lockdown following a surge in local Covid cases.  If this continues to worsen, Giga Shanghai may face another lockdown and more production reduction.  This is a developing situation.  Let us continue to monitor the situation closely.

Other developments

• FSD has accumulated over 35 million cumulative miles.  By the end of Q2/2022, over 100,000 Tesla drivers in North America have been given access to FSD beta as autonomy is been worked on and improved.
• There were upgrades in the software like Tesla Vision to tighten seatbelts pertaining to front crashes.  In V11, there was an introduction of new vehicle controls such as defrost, windshield wipers and seat heaters.
• Battery, Powertrain & Manufacturing - the robot count in their body shops have reduced by 70% per unit of manufacturing capacity.  Tesla will be able to enjoy these in the production of Model Y (Austin) and Model Y (Berlin).
• Energy Storage - it fell due to semiconductor challenges which have a greater impact on their energy business than automotive production.
• Solar saw a growth of 25% YoY. Installation efficiency has been improved and the supplier base has been expanded.
• Services and Others have turned in profits.  Used car business & Tesla merchandise remain strong.  Supercharger business is serving both Tesla and non-Tesla customers to accelerate the transition to sustainable energy.
• Tesla is on track to achieve a 50% average annual growth in vehicle deliveries.

Observations of the financial statements

• Despite the drop in automotive revenue, we saw a growth in energy generation and storage and services & others (used car, supercharger and used car):
• Energy generation & storage grew from $616M (Q1) to $866 (Q2)
• Services & others grew from $1,279M (Q1) to $1,466M (Q2)
• There is also a drop in automotive leasing from $408M (Q1) to $368M (Q2)
• There were "restructuring and other" expenses incurred worth $142M in Q2
• Thus, the net income earned fell from $3,280M (Q1) to $2,269M (Q2)
• Despite the drop in revenue and profitability, we saw a growth in total assets from $66,038M (Q1) to $68,513 (Q2) whereas total liability grew from $30,632M (Q1) to $30,855M (Q2).  This is a good sign with strong net assets.
• Total current assets stood at a healthy $31,222M (Q2) over total current liabilities of $21,821M.
• Net digital assets fell from $1,261M (Q1) to $218M (Q2) - this could be for their BTC ownership, following proceeds of sales at $936M.
• Stock-based compensation fell from $418M (Q1) to $361 (Q2).
• At the end of Q2, there is a gain of 847M in cash, cash equivalent and restricted cash that led to a Q2 quarter-end amount of $18,887M.

Conclusion

Given the challenges in Shanghai, the market has factored in the fall in production and deliveries.  Giga Berlin and Texas have come online and will be ramping up their production.  With an annual capacity of 1.9M, Tesla looks to be a leading force in the EV market.  Thus, it is not surprising that the after-market from the 20th July 2022 trading day ended with a gain of 1.51%.

It is interesting that there were no updates pertaining to Optimus (humanoid) and Tesla Insurance.  It would be interesting to know how much Tesla Insurance has grown.  While the market focused most of its attention on automotive sales, we should not take our eyes off FSD, Robotaxi, Tesla humanoid, Semi, Cybertruck and Tesla insurance. 

Personally, the coming interest rate announcement and Q2 GDP update next week will be critical for the general market sentiment.  If these turn out to be less than favourable, this could dampen the entire market.  Thus, it is important that we factor in the various considerations and research before investing.