Second quarter revenue rose 42% to $16.9bn, as growth in vehicle deliveries and a higher average selling price helped Automotive sales rise 43% to $14.6bn. Revenue from regulatory credits shrunk while other parts of the business, like Energy and Services and Other expanded.
Operating income rose 88% to $2.5bn. This was despite a 13% uptick in operating expenses as higher raw material, commodity and logistics costs weighed. This meant Automotive margins fell from 28.4% a year ago to 27.9%. Profits also suffered from the declining value of bitcoin and the expenses associated with the Shanghai shutdowns. These headwinds were more than offset by revenue growth.
Vehicle production rose 25% with Model Y production up 19% and Model X production up from 2,340 to 16,411. Model X deliveries rose from 1,895 to 16,162. Model Y deliveries were up 20% to 238,533.
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.
Free cash flow was $621m in the second quarter, in line with last year. The group’s net cash position improved from $6.8bn to $14.5bn improved profitability and lower debt obligations.
Shares were up broadly flat in after-hours trading.
“Tesla’s second quarter results received a tepid reception from investors despite growing operating margins in an increasingly challenging environment. 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. 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.
Tesla has announced it’s sold 75% of its Bitcoin and used the profits to purchase traditional currency.
Elon Musk’s affinity for cryptocurrency also chipped away at profits, with the group calling out Bitcoin impairments as a thorn in its side. 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 recognised.
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.
Lars Seier Christensen, Chairman of the Concordium Foundation and founder of Saxo Bank said to FintechZoom:
“Elon Musk’s whirlwind on-off romance with Bitcoin seems to be coming to an end. I wouldn’t read too much into Tesla selling its Bitcoin stake, because it was also clearly stated that this should not be seen as a verdict on crypto, but more a way to increase the liquidity of Tesla.
“That being said, the abrupt reversal on first accepting and then not accepting Bitcoin is interesting. Personally, I think bigger listed companies should avoid making themselves a Bitcoin play and instead focus on their core businesses. There is a wide variety of options if you want to invest in Bitcoin in the long term – either simply buying it outright or through some of the many funds that actively manage their crypto exposure. It doesn’t make sense to do this via Tesla or – in the extreme – Microstrategy.
“Business people should do what they are hopefully best at – running their businesses and exceling in their domain. Combining – or rather confusing – this with rampant crypto speculation is both inefficient and unattractive for their stockholders.”
Marcus Sotiriou, Analyst at the publicly listed digital asset broker GlobalBlock (TSXV:BLOK) said to FintechZoom:
Bitcoin fell last night and the early hours of this morning, after reaching a key resistance level at around $23,250.
Tesla’s earnings report has led to increased pessimism in the crypto market, as it was reported that Tesla sold $936 million of digital assets in Q2, which was 75% of their Bitcoin holdings. It has been speculated that the Bitcoin was sold at around $29,000.
Elon Musk said that Bitcoin and crypto are not yet contributing to an environmentally sustainable future yet. He also stated that the reason for selling was due to the uncertainty with China lockdowns, meaning that they wanted to raise cash in case China shutdown their factories for an extended period of time.
It makes sense that Bitcoin would be considered as an option to sell given the macro-economic backdrop of rising interest rates. However, Tesla’s decision will not sit well with Bitcoin maximalists, as it gives the impression to many institutions that Bitcoin is not a suitable reserve asset or safe haven.
Despite many crypto enthusiasts being critical of Elon Musk’s move, I think this is an example of good risk management from the world’s richest man. Without their Bitcoin sale, their net change in cash would have been negative $89m, which is not desirable, and Bitcoin preceded to fall by around 40% after Tesla sold. Funds and lenders who have faced liquidity issues have been heavily scrutinised for their poor risk management, and rightly so, hence I don’t think Tesla should be criticised for managing their risk in this uncertain macro-economic environment. They may well buy back Bitcoin or other digital assets when conditions improve.
