3 Experts Weigh-in on Elon Musk’s Car Maker

  • The world pays attention to whenever Tesla puts results out, and this quarter is no different.
  • The car maker has sold off 75% of its bitcoin but other aspects of the update are more important.
  • 3 analysts have weighed in on the results and one has revealed a new price target.

There are a handful of companies that the world pays attention to whenever they put results out, and Tesla is certainly among them.

From being involved in an exciting area of ​​tech through to the iconic nature of the brand and massive profile of its chief executive Elon Musk, people care about Tesla. Particularly equity investors.

After hours on Wednesday, the company revealed its second-quarter results and the reception has been mixed. The numbers appear to have held up well though despite global supply chain issues persisting and the company’s factory in China being hit by another COVID lockdown.

Tesla’s eye-catching revelation that it sold off 75% of its bitcoin last quarter garnered a lot of attention, but the most important numbers were a 42% rise in revenue to $16.9 billion, operating income up 88% to $2.5 billion despite higher raw material costs, and a 25% rise in vehicle production. Free cash flow was flat on last year at $621 million.

These positive updates were tempered by margins being squeezed from 28.4% a year ago to 27.9%.

“Tesla posted sequentially lower numbers but all key P&L numbers surprised positively with earlier price hikes feeding through average revenue per unit (ARPU),” said Philippe Houchois, equity analyst at Jefferies. “Cashing in bitcoin avoided a write down.”

“Manufacturing challenges persisted through the quarter, limiting the ability to run gigafactories at full capacity. The shutdowns in Shanghai persisted for most of the quarter, resulting in higher per-car costs.”

“As expected, working capital constrained free cash flow on high quarter-end inventories set to reverse in Q3,” Houchois added. “Tesla continues to set new manufacturing benchmarks with installed capacity now at 1.9m units. Q2 beat and management comments on record second half production suggest 5-7% upside to current EBIT (earnings) consensus.”

Jefferies’ updated price target for Tesla shares is $1,050 and it is rated as a “buy”. At Wednesday’s close the shares were at $742.50.

‘Tepid reception for sturdy results’

“Tesla’s second quarter results received a tepid reception from investors despite growing operating margins in an increasingly challenging environment,” noted Laura Hoy, equity analyst at stockbroker Hargreaves Lansdown.

“However, the focus was on a decline in automotive gross margins, which fell from 32.9% in the first quarter to 27.9%. The more cars that rattle through Tesla’s enormous gigafactories the lower the per-unit costs, so the disappointing delivery numbers released earlier this month meant investors had already braced themselves for a step down in profitability.”

“On the bright side, this should be a short-term problem,” she continued. “As we saw in the first quarter, fully functioning factories send dollars straight to the bottom line. Once supply chain bottle necks ease and the factories are humming along at full capacity, margins will get a boost.”

Hoy noted that Tesla’s much-talked about crypto play has been a distraction rather than a major financial issue, but it does raise questions for investors.

“Elon Musk’s affinity for cryptocurrency also chipped away at profits, with the group calling out bitcoin impairments as a thorn in its side,” she said. “It’s unclear exactly how much the group lost to the sell-off in crypto, but with 75% of its holding now converted into more stable currency, most of the damage has been recognized.”

“However, the bitcoin losses point out an important part of the Tesla investment case—its eccentric owner. While Musk’s impressive innovation has served the company well, his personal flair is starting to raise governance questions.”

Mark Crouch, an analyst at eToro had a relatively bearish take, noting the “strain” from a difficult global economy is now showing.

“Tesla had once seemed to weather the global chip shortage and supply chain crisis where other car makers were struggling, but its latest quarterly earnings show it is now also feeling the strain,” he said.

“On an annual basis, the firm has managed to grow revenue by 42% and earnings by 57%. However, both financial measures are down significantly between the first and second quarters, demonstrating that Tesla is far from immune from the production issues other manufacturers are facing.”

He added that the reopening of Tesla’s Shanghai factory will help, but materials shortages are something the entire industry is contending with and there is no easy or quick remedy. For that reason he said he is not expecting a sharp uptick in performance in the third quarter.

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