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Tesla (TSLA) stock has shown a solid rebound, gaining more than 18% over the past month. This recovery can be attributed to investors’ optimism surrounding several key developments, such as the potential for Robotaxi, the launch of a low-cost, affordable electric vehicle (EV) model, and advancements in Full Self-Driving (FSD) technology.
However, Tesla’s recent second-quarter (Q2) earnings report has tempered this enthusiasm, raising questions about the stock’s future prospects.
Against this backdrop, let’s examine some of the factors determining whether investors should buy, sell, or hold Tesla stock after its Q2 earnings.
TSLA's Q2 Earnings in Brief
Despite a solid start to the fiscal year, marked by well-received Q1 earnings, Tesla's Q2 earnings fell short of expectations. Tesla posted adjusted earnings of $0.52 per share, missing analysts’ EPS forecast of $0.61. Moreover, its Q2 EPS was below the prior-year quarter’s earnings of $0.91 per share.
Total revenue increased by 2% year-over-year to $25.5 billion, driven by growth in the Energy Generation and Storage business and higher regulatory credit revenue. However, this was offset by lower average selling prices and a decline in vehicle deliveries.
Tesla's adjusted EBITDA margin dropped to 14.4% in Q2 from 18.7% in the same period last year. More alarming, its EBITDA margins fell about 150 basis points sequentially. This decline raises concerns about the company’s profitability.
With the auto business stalling and margins continuing to be squeezed, let's examine the factors that could determine Tesla's stock's future trajectory.
Positive Takeaways from Q2
Tesla’s Energy Storage division continues to perform exceptionally well. The company set a record in Q2 with 9.4 GWh of deployments, resulting in record revenues and gross profits for the segment. With increased production at its U.S. factory and the construction of the Megapack factory in China, Tesla is poised to double its output in this area. Further, the robust backlog in the Energy Storage business is expected to support revenue growth in the coming quarters.
Besides the strength in the Energy business, Tesla saw a sequential rebound in vehicle deliveries in Q2, aided by improved consumer sentiment and attractive financing options designed to counter the effects of high interest rates. Tesla's management also reported a resurgence in global EV penetration, with EVs gaining market share from internal combustion engine (ICE) vehicles.
Tesla’s leadership said the company made significant progress in its AI initiatives during Q2. However, they didn’t provide much detail about those AI initiatives.
The company reduced the price of FSD (Supervised) in North America and offered free trials to customers with the necessary hardware. These efforts have yielded success, and are expected to lead to higher FSD adoption rates as the technology improves and its benefits become more widely recognized.
Further, Tesla continues to focus on reducing costs across the company, including lowering the cost of goods sold (COGS) per vehicle and accelerating the development of AI-enabled products and services.
While the timing of the Robotaxi launch hinges on technological advancements and regulatory approval, Tesla is actively pursuing this opportunity, recognizing its substantial growth potential.
Negative Takeaways from Q2
Tesla's core auto business faces significant challenges. Demand remains soft due to elevated interest rates and increased competition, and revenue per unit is likely to stay under pressure as the company offers discounts and competitive financing rates to boost sales. This will continue to drag on margins and overall profitability.
It’s worth noting that Tesla’s premium valuation has traditionally been supported by its leading industry margins. However, the gap between Tesla’s margins and its competitors is shrinking. With lower sales volumes and pricing pressures, this margin gap is likely to narrow further in the upcoming quarters, challenging the justification for Tesla’s high valuation.
During the Q2 earnings call, Tesla’s management focused heavily on ambitious plans like Robotaxis and the Optimus project, which are still several years away from significantly impacting the company's financials. This focus raises concerns about the company’s immediate growth prospects.
Tesla could face challenges in growing automotive units in 2024. Adding to the challenges, the recent tests of its autonomous driving software by Truist Securities highlighted notable shortcomings, casting doubt on the company’s leadership in autonomy.
The Bottom Line on Tesla Stock
Several positive catalysts are on the horizon for Tesla stock, including the launch of a new low-price model expected in early 2025 and an upcoming Robotaxi update. However, softer deliveries and pressure on auto margins could continue to weigh on its stock price in the near term.
This cautious outlook is reflected in analysts’ recommendations for Tesla stock. Out of 33 analysts covering TSLA, seven recommend a “strong buy,” two suggest a “moderate buy,” 16 have a “hold,” and eight have a “strong sell.” This results in a consensus rating of “hold.”
The average price target for Tesla stock is $197.18, suggesting an expected downside potential of about 14% from current levels.
On the date of publication, Amit Singh did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
