Tesla Inc. (TSLA) shares are moving sharply lower after reporting a second-quarter loss that was much wider than expected, bringing its overall growth story into question.
Tesla were down 11% before Thursday's opening bell after the company reported a loss of $1.12 per share in the second quarter, more than triple the loss expected by Wall Street.
The figure is particularly surprising considering that Tesla achieved record deliveries -- including 77,634 units of its flagship Model 3 sedan -- for the period. Group revenues also trailed estimates, even as they grew nearly 60% from last year to reach $6.35 billion. However, a decline of 1.7 percentage points in the group's gross margin indicates volume and revenue growth aren't translating into near-term profits.
"TSLA's 2Q19 result of -$1.12 should mark the top of the current 'swing trade'," Barclays analyst Brian Johnson said. "Simply put, Tesla is not poised for significant structural profitability, in our view - even with regulatory credits and modestly improved gross margin ex credits."
Johnson kept an "Underweight" rating on the stock and a $150 price target. With his already bearish posture, Johnson was one of few analysts not to cut price targets after the messy quarter.
Analysts noted that record deliveries were likely aided by price cuts on certain models, which squeezed margins for a company that had shown glimpses late last year of achieving positive bottom-line results.
"Automotive gross margins were well below expectations (approx. 18.9% vs. GSe 19.8% and consensus of 20.5%) - and were the key metric investors were focused on into the print given the record amount of deliveries," Goldman Sachs analyst David Tamberrino said. "We believe this will weigh on shares as investors question the company's ability to maintain vehicle proﬁtability while increasing demand, which is still an area for debate."
Promoting the Positives
While there was not much to like, there were some key positives that could keep bullish investors on board as the stock retreads levels from the start of July.
The primary positive is an improving free cash flow number.
"We stabilized international logistics and delivery operations at higher volumes, and we saw gross margin improvement in nearly every aspect of the business adjusting for the impact of regulatory credit revenue," Tesla CFO Zachary Kirkhorn told analysts. "As a result of these accomplishments, we once again achieved strong free cash flows which is only partially attributed to working capital benefits. We also successfully raised roughly $2.4 billion in net proceeds in May. Thus, we exited the quarter with $5 billion in cash and cash equivalents, the highest in our history."
Given calls from some bearish investors and analysts suggesting Tesla's need to raise more capital, the cash figure should quiet some of the noise around the debt-laden company and has encouraged some positive comments among bulls.
The company is in such a better position than last year and the stock is way cheaper! 3 out of the last 4 qtrs cash flow positive. Record amount of cash on the books $5 bil. Record deliveries and production of pure EVs and developing FSD, way ahead of everyone. $TSLA— Ross Gerber (@GerberKawasaki) July 24, 2019
Full-year guidance on deliveries was also maintained, indicating the company intends to sustain its popularity among auto buyers, with particular attention paid to higher-margin vehicles such as the Model Y.
CEO Elon Musk also moved the focus to full self-driving in terms of margin improvements ahead.
"On the gross margin point, full self-driving is just an extremely important part of the margin calculation," Musk told analysts. "The gross margin over time will be really quite compelling when factoring in the full self-driving option which is accounted to $7,000 in mid-August, and that number will increase over time."
Impressed that $TSLA $TSLAQ grew automotive gross margins (ex-credits) by 200bps (green line). Showing some signs of efficiency, but still only 17.2% with high margin S/X/3 sales declining. Also don't forget hiding repairs in service & other. pic.twitter.com/jsH57ajz9u— Paul Huettner, CFA (@Paul_M_Huettner) July 24, 2019
Still, much of the increase in free cash flow comes from capex reductions, which is quizzical given the growth story management continues to tout and Tesla's continued investment in its Shanghai Gigafactory.
"While bulls may claim opex and capex sequential declines is good news, we question how this fits with the view of Tesla as a hypergrowth company investing in new platforms and new production capability," Barclays' Johnson said.
Johnson cited statements from Tesla suggesting it may be playing with payment terms from equipment suppliers to reduce these figures in the near term as promoting his skepticism.
As an interesting aside, neither robotaxis nor insurance products were mentioned on the call despite their promotion at Tesla's investor day earlier this year.
Another Executive Exits
Aside from the nitty-gritty details in the report, a big surprise came with the announcement that co-founder JB Straubel will be vacating his post as chief technology officer.
"An important update is that JB Straubel, our Co-founder and Chief Technology Officer will be transitioning to a Senior Advisor from the CTO role; and Drew Baglino will be taking over most of JB's responsibilities," Musk said to close of his prepared remarks on Wednesday evening. "I'd like to thank JB for his fundamental role in creating and building Tesla."
The departure is particularly interesting as Tesla's investor website credits Straubel as "the inventor on over 30 patents covering most areas of Tesla's core battery, motor and controls systems."
Most recently Straubel was credited as the inventor of Tesla energy storage technology in late May, adding to his bulky book of inventions.
"In our view, this may be the biggest news of the quarter," Morgan Stanley analyst Adam Jonas said. "Investors may question what motivated the 15-year Tesla vet to give up direct operational responsibility at this time. Unfortunately, nobody asked this on the call."
Still, it is worth noting that Straubel will remain as an advisor and has stated his commitment to aid Tesla ongoing efforts.
"I just want to make sure that people understand that this is not some lack of confidence in the company or the team or anything like that," he told analysts. "Drew [Baglino] and I have worked closely together for many, many years, and I have total confidence in Drew, and I'm not going anywhere if there's anything I need to do to be helpful to Drew or the whole team or any of the ongoing projects."
Nonetheless, Straubel is added to the list of tens of executives to leave Tesla's ranks since the start of 2018, promoting some questions as to troubles at the top of the company.