Tesla Q2 Earnings – Record Shipments Yet Still Not Profitable, Stock Plummets

Tesla to have its gearboxes and electric motors manufactured at the Gigafactory in Nevada.

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Shares of Tesla Inc plunged in after-hours trading this evening as the automaker posted staggering losses that exceeded Wall Street expectations despite the record number of vehicles it shipped in the quarter.

Earnings came up well short of expectations while revenue came in more or less inline with what most analysts were expecting. The important numbers look like this:

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  • Earnings per share: loss of $1.12 vs a loss of 40 cents as expected
  • Revenue $6.35B vs $6.41B
  • 95,356 vehicles produced vs 80,000 expected

As of this writing, Tesla (NASDAQ:TSLA) is down by 29 dollars, over 11 percent in after-hours trading.

Tesla continuing to ramp-up production of Model 3, Shanghai factory to come on-line this year

Let's take a deeper look into Tesla's second-quarter results. Consensus analyst expectations were hoping the EV-maker would at least shore up its losses to -40 cents per share (adjusted), yet Tesla posted a loss of $1.12 per share after accounting for one-time charges.

While bigger-than-expected losses can and do happen, a fresh wave of optimism was riding high among Tesla investors as the automaker preempted its quarterly earnings with seemingly very good news: it had crushed its previous quarterly record with 95,356 units shipped in Q2.

Despite this, the company lost over $400 million dollars in the quarter. Last year both Q3 and Q4 saw the automaker post profitable quarters, so why is it still losing money? Chalk up most of this to costs relating to refining its manufacturing process while continuing to push its production lines to the limit.

Tesla was able to sustain shipments of at least 7,000 Model 3s per week throughout the quarter, and according to Musk, expects that figure to climb to as high as 10,000 Model 3s by the end of the year. Adding the capacity to build thousands of more cars and SUVs per week costs money and its showing on the balance sheet.

Tesla's Gigafactory 3 in Shanghai is rapidly approaching completion.

It's also plowing ahead with its next factory location in Shanghai, China. According to the press release, local production of the Model 3 in China will actually commence by the end of this year. This will provide a big boost for Tesla as vehicles produced there won't have to deal with hefty import taxes and of course it can seriously increase the volume of available units there too since it seems to be selling all it can make between North America and Europe.

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However, it must be said that in the Chinese domestic market competition is absolutely fierce when it comes to electric vehicles, perhaps greater there than anywhere else in the world. Tesla will be pushing its models into a market that has many fully electric, and affordable options to choose from already. Apple famously lost its stranglehold in China to homegrown competitors such as Huawei, will Tesla fare better in an uphill battle against its own competitors? Remember, Apple had a sizeable headstart, Tesla will be entering the race very late as compared to its peers.

Hit with a dagger, co-founder and CTO Straubel is giving up his role as Chief Tech Officer

Arguably much worse than a quarter's worth of disappointing earnings is the just-announced departure of longtime Chief Technology Officer JB Straubel. Straubel and Musk, while not direct founders of the company, entered the business in the mid-2000s and quickly transformed the fledgling startup to one that had serious aspirations - with brains and money to back it in its ventures.

Straubel will be stepping down from his role as CTO and will most likely be effectively gone from the company. In an obvious move to attempt some form of damage control, the company announced that Straubel would stay on as a "senior adviser" - whatever that means.

“I’m not disappearing, and I just wanted to make sure that people understand that this was not some, you know, lack of confidence in the company, or the team, or anything like that,” Straubel added on the call. Straubel seems to be paying some lip-service to his longtime from Elon with that. With the company finally on the cusp of cranking out high volume, affordable Model 3s on a few different continents and coming within striking range of turning some real profits, why would its longtime CTO depart?

Tesla has been known to cycle through executives as few other companies have managed, and one must wonder if Mr. Musk's polarizing leadership style had something to do with it after all these years. Today's stock price drop may have just as much to do with a high profile departure like this as it does the disappointing earnings.

Despite all this noise, Tesla' seems to be shoring up its financials. The automaker generated over $600 million in free cash flow in the second quarter, and it reduced its planned capital expenditures from $2 to $2.5 billion to $1.5 to $2 billion. In the quarter a year ago Musk & Co. lost more than $3 dollars per share (adjusted), so while $1.12 loss per share fell short, its still a massive improvement in just one year. Another promising figure is that Tesla achieved a 20 percent gross margin on its Model 3's, ever-so-slightly above the average of 19 percent it has projected for its entire fleet.

Tesla will continue to be saddled with big-time capex charges for quite some time and this shouldn't surprise anyone. Elon Musk, despite numerous shortfalls, is easily one of the most ambitious men in the world. It takes billions of dollars to survey, acquire land, build-out massive buildings, and of course staff them up with talent to run them. The CEO has been very public about planting a factory on every continent, and concerning that goal: The European Gigafactory 4 will soon have a formal location announced in the coming months.

Lastly, Tesla just raised over $2 billion in new capital earlier in May. It's not exceedingly rare for companies to raise further rounds of capital, yet Tesla has been on red-alert for several quarters as its cash-burn rate has caused some alarm due to its sketchy cash position. Its cash position in Q4 last year was about $3.8 billion, yet by the end of Q1 it was down to $1.3 billion. Granted, the company had to fork out almost a billion to pay back some convertible notes. Given the $600M free cash flow and recent fundraising, Tesla now has over $5 billion in cash on hand, the highest amount ever for Tesla.

However, one must wonder when Tesla will finally be out of its never-ending expansion mode and finally begin to climb consistently into the black.

Tesla's investor press release.


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