The price cut promotion became a double-edged sword, and investors began to worry about Tesla becoming an ordinary car manufacturer

Tencent News "Car Circle" by Ji Zhenyu from Silicon Valley

In the second quarter of the past, electric vehicle manufacturer Tesla's revenue reached $24.93 billion, which not only exceeded previous market expectations, but also set a record high quarterly revenue record, while Tesla's net profit in the quarter increased by 20% year-on-year to $2.7 billion.

Although both revenue and profit exceeded expectations, Tesla's stock price fell nearly 5% during the after-hours trading session after the earnings report. Obviously, the record revenue record is not enough to satisfy investors, or rather, the focus of investors is not the continuous expansion of Tesla's revenue, but Tesla's current profitability as an electric car manufacturer.

In the second quarter, the gross margin of Tesla's electric vehicle business further fell to 18.1% from 18.3% in the first quarter. In fact, Tesla's record revenue in the second quarter and the decline in profit margins were caused by the factor of price reduction promotions.

Tesla shares have risen nearly 170% so far this year, making it one of the best performing stocks among U.S. stock companies. The factors driving Tesla's continued sharp rise mainly include the expectation of the new model Cybertruck, Tesla charging pile will provide third-party use and Musk's various future visions, but the profit indicators or profit trends presented in the earnings report are provoking the sensitive nerves of investors, once Tesla shows more and more like other traditional car manufacturers, then the current high valuation will inevitably be challenged.

As the head and sole spokesperson of Tesla, Musk naturally knows this. At the investor conference after the earnings release, he repeatedly emphasized Tesla's vision for the future and downplayed the quarterly earnings indicator figures as "stupid", just to tell investors that Tesla is unique and not to compare Tesla with traditional automakers. But whether investors buy or not, the future stock price trend will tell the whole story.

"Price reduction promotion" becomes a "double-edged sword"

Tesla achieved revenue of $24.93 billion in the second quarter, of which $21.268 billion came from electric vehicle sales, both of which increased by about 46% year-over-year. At the same time, the energy storage business also performed well, with revenue increasing by 74% year-on-year, but the scale of revenue was still small, only $1.509 billion, accounting for only 6% of total revenue.

However, it is worth mentioning that electric vehicle-related services and other revenue reached $2.15 billion in the second quarter, an increase of 47% year-on-year, which is also the first time Tesla's service revenue has stood at $2 billion in a single quarter. Tesla said in its earnings report that the second quarter is the "overcharging quarter", in which the world's major car manufacturers, including Ford, General Motors, Mercedes-Benz, Nissan, Volvo and electric vehicle manufacturers Polestar, Rivian, etc., have announced that they are suitable for Tesla's NACS charging standards.

While the quarterly revenue was record and Tesla's profit also maintained steady growth, reaching $2.703 billion in the second quarter, up 20% year-over-year.

But the gross margin of Tesla's electric vehicle business fell further to 18.1% in the second quarter, which is far from the 20% gross profit target that Tesla has always set. When the launch date of Tesla's new model Cybertruck has not yet been determined, the discount promotion of the current model is a pain that Tesla has to experience.

From a purely financial point of view, Tesla's performance in the second quarter is still very solid, operating cash flow increased by 30% year-on-year to $3.065 billion, thanks to a capital expenditure growth of only 19%, Tesla's free cash flow increased by 62% to $1.005 billion in the second quarter, and as of the end of the second quarter, Tesla's cash and equivalents on the account reached $23.075 billion, and Tesla's cash reserves have increased for five consecutive quarters. The abundant cash provides a solid foundation for Tesla's future business expansion, whether it is continuous investment in electric vehicle manufacturing or future business expansion.

Is Tesla's high valuation foundation still stable?

Despite record revenue in the second quarter and modest profit growth, its stock underperformed after hours after the earnings report, falling nearly 5% at one point. Obviously, investors are not very satisfied with the results presented by this earnings report.

The focus of investors is that Tesla's earning power is declining, and in fact this trend has been showing signs since the second half of last year. Tesla's operating margin peaked at 17.2 percent in the third quarter of last year and then slipped all the way down to less than 10 percent in the latest second quarter.

Although Tesla still has a clear advantage in profitability compared with other car manufacturers, Tesla's profitability level is getting closer to its peers, which also shows that Tesla's business is increasingly showing the characteristics of a large car manufacturer, and the decline in profit margin is almost inevitable.

The above trend is also in the context of Tesla's multiple rounds of price reduction promotion this year, the new model Cybertruck has not yet announced a clear delivery time, Tesla is facing the dilemma of "green and yellow" in the short term.

Although on an investor conference call after the earnings report, Musk said that fluctuations in short-term earnings metrics are insignificant relative to long-term goals. He then began to emphasize his long-term vision for Tesla, including the realization of fully unmanned autonomous driving, and even described future scenarios such as how to use Neuralink's brain-computer interface to combine with Tesla-made robotic arms and robotic legs.

"Automation is going to make these earnings numbers look silly and ridiculous right now." Musk said.

But investors apparently didn't buy it, at least not on the day of Tesla's earnings release. At least two investment banks raised concerns about Tesla's earnings metrics ahead of Tesla's earnings this week, with Morgan Stanley analyst Adam Jonas citing profit margins as his most important indicator for this quarter's Tesla earnings report. Wedbush analyst Daniel Ives believes that the profit margin indicator can reflect Tesla's impact on the price reduction promotion of its electric vehicles over the past period of time and the impact on the future direction of related indicators.

For the rest of the year, Tesla needs to prove that Tesla is unique in the industry from other automakers. In fact, Tesla's current valuation has also reflected the outside world's perception of it, Tesla's P/E ratio is as high as 85 times, far higher than the pitiful P/E ratio of some traditional manufacturers in the automotive industry, Tesla's high valuation is completely based on confidence in Musk's extraordinary ability, Tesla's current leadership in the electric vehicle industry, recognition of future electrification trends, and Tesla's own business expansion and evolution, including automatic driving, robotics, artificial intelligence, etc. However, once Tesla becomes more and more like a traditional car manufacturer in operation, investors' belief or cognition of Tesla will undoubtedly greatly affect Tesla's valuation.