Tesla Q2 2023 Earnings: A Beat But Margin Shrinks. What Should Tech Investors Know?

July 20, 2023

The world’s leading electric vehicle (EV) manufacturer, Tesla Inc (NASDAQ: TSLA) reported stellar earnings during its Q2 FY2023.

This came amid its price cut strategy that squeezed its profit margin.

Tesla beat analysts’ expectations in Q2 FY2023 as profit, excluding some items, came in at 91 US cents per share, more than the 81 US cents that the street expected.

Similarly, revenue rose 47% year-on-year (yoy) to US$24.9 billion, outpacing the US$24.5 billion in sales expected by analysts.

Meanwhile, the Elon Musk-led company saw its gross margin decline to 18.2% during the quarter, slightly below Wall Street estimates of 18.8% and far lower than the 25% margin from a year ago.

With Tesla sacrificing profitability for sales, should investors be concerned? Here are some of the key takeaways from the EV manufacturer’s Q2 2023 earnings.

1. Tesla’s price cut strategy to drive growth is working

Earlier this month, Tesla reported 466,140 total vehicle deliveries for the second quarter and said it had produced 479,700 EVs.

Deliveries are the closest approximation of sales that Tesla reports.

Those deliveries were higher than Wall Street expected and were partly driven by incentives and discounts.

This shows that the EV manufacturer’s price cut strategy is working as revenue jumped by 47% yoy to US$24.9 billion.

This was Tesla’s record quarterly revenue.

2. Strong cash flow

Tesla’s financial management remains strong as seen by its strong cash flow.

With an operating cash flow of US$3.1 billion and free cash flow at US$1.0 billion, the company’s liquidity seems robust.

The EV maker’s cash position has also improved as cash and investments rose by US$0.7 billion to reach US$23.1 billion.

This increase was partly offset by other financing activities, including debt repayments.

3. Rising R&D costs

Another area to take note of is its rising research & development (R&D) costs.

These rose to US$943 million in Q2 from US$771 million in Q1 as management is focused on “being at the forefront of AI development,” and has started production of its Dojo “training computers.”

While the potential is significant, the actualisation of these technologies into profit centres remains to be seen.

4. Tesla focus on improving its operations

Despite price cuts in Q1 and early Q2, Tesla has upheld a strong operating margin of around 10%.

This is testament to its relentless cost-cutting initiatives and production successes in Berlin and Texas.

Notably, the Model Y clinched the title of the best-selling vehicle worldwide in Q1, and the eagerly awaited Cybertruck is progressing according to its production schedule.

However, an anticipated Q3 FY2023 production slowdown raised concerns during the earnings call.

Coupled with the lack of clarity on the Cybertruck and robotaxi-ready vehicle’s debut, this caused a dip in Tesla’s share price in after-hours trading.

5. Ambitious growth target

Tesla’s future projections remain ambitious, with an aim to exceed the 50% Compound Annual Growth Rate (CAGR) set in early 2021.

They project around 1.8 million vehicle deliveries for 2023.

However, as the company diversifies its profit sources, moving towards AI, software, and fleet-based avenues, the complexities and challenges of these areas need careful navigation.

Invest in Tesla for its leading EV role and innovation

While Tesla’s Q2 2023 results reaffirm its dominant market position and ability to innovate, challenges in managing operational costs, external factors like foreign exchange impacts, and the road to monetising new technologies highlight the intricacies of its growth journey.

Long-term investors can focus on Tesla’s strong track record and, with a shift in focus to drive growth at the cost of profitability, this will put Tesla on a different growth trajectory.

Investors can take comfort that its operational profit margin remains at a healthy level despite recent price cuts.

With exciting prospects going forward, Tesla will be one stock that investors will pay close attention to.

However, before investing, it is imperative to conduct your own due diligence.

Thoroughly research the company’s financials, understand market trends, and be aware of potential risks specific to Tesla, such as a delay in launches of its Cybertruck and the rising R&D costs that might not translate into a profitable venture.

This will ensure that your investments align with your long-term financial goals and risk tolerance.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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