Tesla (TSLA) Q2 2024 Earnings Review

EV giant Tesla (TSLA) dropped its Q2’24 earnings report (April to June 2024) after the bell on 7/23. The results beat the Street on revenue but came in slightly below expectations on earnings.

Tesla (TSLA) Q2 2024 Financial Results Release

• Revenues: $25.5B (YoY +2%)
• EPS (non-GAAP): $0.52 (YoY -43%)
• Gross margin: 18% (YoY -23 bp)
• Operating margin: 6.3% (YoY -333 bp)
• Deliveries: 443,956 (YoY -5%)
• Global vehicle inventory: 18 days (YoY 13%)

After experiencing its first year-over-year revenue decline since Q2 2020 and the most significant contraction since Q3 2012 last quarter, Tesla’s revenue returned to growth this quarter, hitting an all-time high. This ended a three-quarter streak of missing market expectations, primarily driven by energy business growth, Cybertruck deliveries, increased carbon credit sales, and other business growth. These gains were partially offset by a decline in average selling price (ASP), lower delivery volume, and FX headwinds.

The company-wide gross margin came in at 18%, slightly below the 18.2% from the same period last year but an improvement from 17.4% in the previous quarter. Automotive gross margin slipped to 18.5% (vs. 19.2% YoY), or 14.6% excluding regulatory credits (vs. 18.1% YoY). The average selling price per vehicle was approximately $41,738, down from about $43,804 in the same quarter last year and $42,553 in the previous quarter.

Q2 operating income decreased 33% YoY to $1.605 billion, with an operating margin of 6.3%, down from 9.3% YoY but slightly up from 5.5% QoQ. Net income came in at $1.478 billion, down 45% YoY. Excluding one-time expenses and stock-based compensation, non-GAAP net income was $1.812 billion, a 42% YoY decline.

Automotive Business

Tesla’s Q2 automotive sales declined 7% YoY to $19.88 billion, marking the second consecutive quarter of contraction. This includes record regulatory credit sales of $890 million (about 3.5% of total revenue). Energy generation and storage revenue reached $3.014 billion, doubling YoY. Services and other revenue (including out-of-warranty vehicle repairs) came in at $2.608 billion, up 21% YoY. Notably, energy business revenue exceeded 10% of total revenue for the first time.

Tesla delivered 444,000 vehicles in Q2, up 15% QoQ but down 5% YoY, beating the Street consensus of 439,000. This marks Tesla’s first consecutive quarterly delivery decline since 2012, though the YoY decline in Q2 deliveries showed slight improvement from the previous quarter. On the production front, Tesla manufactured 410,800 vehicles in Q2, down 14% QoQ and 5% YoY.

Global days of supply increased to 18 days from 16 days YoY but significantly decreased from 28 days in the previous quarter, easing inventory pressure. Q2 free cash flow turned positive at $1.342 billion from negative $2.531 billion in the last quarter, mainly driven by $1.8 billion in inventory reduction, partially offset by $600 million in AI infrastructure capex.

Tesla’s maximum annual capacity across its global factories exceeds 2.35 million units. The company continues to expand its model lineup, including introducing new Model 3 and Model Y variants and adding additional paint options for Models S, 3, X, and Y. Cybertruck production capacity is also ramping up, with Q2 production more than tripling from the previous quarter, and maximum annual capacity expected to reach 125,000 units.

Energy and Other Businesses

In the energy segment, total energy storage deployments reached 9.4 GWh in Q2, up 129% QoQ and hitting a record high for the second consecutive quarter. This stands out as the brightest spot in the earnings report.

Services and other revenue grew 21% YoY to $2.6 billion. This growth reflects Tesla’s expanding vehicle fleet and increased demand for after-sales services. Simultaneously, the company is expanding its Supercharger network, with plans to deploy more charging capacity in North America this year than all other companies combined.

Tesla (TSLA) Q2 2024 Earnings Call

Musk believes Tesla’s investment in AI robots is the most comprehensive, including Full Self-Driving (FSD) and the humanoid robot (Optimus). He predicts global demand for humanoid robots will reach 20 billion units and emphasizes that the company’s primary value lies in autonomous driving and robotics technologies. In his view, investors who don’t share this vision shouldn’t hold Tesla stock.

He believes most people haven’t yet grasped how good FSD has become. If Trump is elected and cancels EV subsidies, it would have a minimal impact on Tesla but could be devastating for competitors, potentially benefiting Tesla in the long run. Additionally, the company expects to maintain annual capital expenditure (CAPEX) at $10 billion.

Electric Vehicles

In Q2, two-thirds of sales came from first-time Tesla owners. Vehicle sales growth in 2024 is expected to be significantly lower than in 2023.

Global EV market share has returned to a growth trajectory. Green Credits revenue hit a new high, mainly due to other automakers falling behind in meeting emission standards. The average selling price (ASP) of the main S3XY models (Model S, 3, X, Y) continued to decline this quarter, driven by price adjustments and promotional financing. Notably, the negative impact of exchange rates amounted to $300 million.

Currently producing 1,400 Cybertrucks with 4680 batteries per week, with capacity tripled from Q1 and expected to turn profitable by year-end. Q2 production of 4680 batteries increased 50% QoQ, with continued cost improvements. The first Cybertruck using dry electrode technology has been produced, with mass production expected in Q4, potentially significantly reducing costs.

Semi-production is slated to begin at the end of the year, the low-cost model is planned for launch in the first half of next year, and the Roadster is expected to debut next year.

Construction of the Mexican Gigafactory has been paused due to post-election policy uncertainties. Robotaxi and Optimus are expected to be produced at the Texas Gigafactory.

In response to potential additional tariffs on Chinese EVs in Europe, Tesla is adjusting its production strategy, planning to shift some vehicle production to the Berlin Gigafactory. Even if faced with additional tariffs, Tesla expects its burden to be lower than that of Chinese EV manufacturers.

Full Self-Driving (FSD)

Full Self-Driving (FSD) V12.5 is being gradually rolled out, with a five-fold increase in version parameters and merged highway and city modes. Musk believes that as the miles driven without human intervention increase, FSD will transition from requiring human supervision to a version that doesn’t need supervision.

A significant increase in intervention-free mileage is expected by year-end, with unsupervised autonomous driving levels potentially achievable next year. Tesla plans to apply for FSD approval in markets outside the U.S. when V12.5 or V12.6 is released.

Several automakers have expressed interest in FSD licensing, but negotiation details haven’t been disclosed. Musk hopes for licensing to start with at least a million vehicles. Even if other automakers obtain licenses, it would take years to develop FSD-compatible models.

Robotaxi

The dedicated Robotaxi model will adopt an “unboxed” production strategy. The launch event has been postponed from August 8 to October 10 to incorporate several significant changes.

When asked about future Robotaxi operation models, capital expenditure, and potential operating partners, Musk responded that the future operation model leans towards an Airbnb model, with vehicles primarily owned by individual owners. Tesla would also operate some vehicles directly and believes most owners would be willing to join the Robotaxi service.

AI and Supercomputers

The supercomputer expansion area at the Texas Gigafactory is nearing completion and will house the company’s largest H100 cluster, including over 50,000 H100 GPUs and 20,000 AI5 hardware units. The next-generation AI5 hardware has inference power equivalent to NVIDIA’s B200 and can be used for distributed AI computing.

To ensure sufficient training capacity, the company will increase its investment in Dojo (Tesla’s in-house AI training supercomputer) due to the shortage of NVIDIA GPUs. Musk believes Dojo has the potential to reach the competitiveness of NVIDIA systems in the future.

If approved by shareholders, Tesla will invest in xAI (Musk’s newly established AI company), but Musk emphasizes that xAI won’t take priority over Tesla.

Optimus

Optimus (humanoid robot) has completed its first task in Tesla factories. Plans are in place to produce the first official version of Optimus early next year, with thousands of units expected to be deployed by the end of next year. Tesla plans to mass-produce Optimus and officially launch sales in 2026 as a second-generation product.

Energy and Charging

Megapack (large-scale energy storage system) and Powerwall (home energy storage system) installations hit record highs in Q2. Despite significant growth, Tesla cautions investors about potential business volatility.

The company believes Megapack has a strong advantage in software and sees no signs of market saturation for energy storage devices. In addition to expanding U.S. factory capacity, there are plans to establish a Megapack production line in Shanghai.

Tesla plans to expand its Supercharger business, with new installations in North America expected to exceed the total of other operators by year-end.

Review and Analysis

Strengths and Opportunities:

• EV sales are rebounding, with healthy inventory levels
• Next-generation vehicle launch schedules are currently on track and can utilize existing production lines, reducing capital expenditure and vehicle costs
• 4680 battery production is progressing smoothly
• FSD V12 is receiving positive feedback and appears to have room for continued improvement, increasing the likelihood of licensing to other automakers
• Deploying massive GPU computing power will widen the gap with autonomous driving competitors
• Robotaxi and Optimus projects are progressing well, with substantial potential future markets
• Energy business poised for solid growth in the coming years
• Strategic import controls on Chinese EV products in European and American countries
• Traditional ICE automakers in Europe and America are reducing investment in EVs
• The Federal Reserve may begin an interest rate-cutting cycle

Weaknesses and Threats:

• Limited sales growth potential for existing vehicle models
• Competitors from China continue to maintain strong competitiveness, necessitating sacrificing gross margins to drive sales, impacting profitability
• If Trump is elected, potential cuts to EV industry subsidies could increase operating costs
• CEO Elon Musk’s political stance may negatively impact Tesla’s brand image

EV Sales Bottoming Out and Rebounding

Although Tesla’s automotive revenue and EV sales still decline compared to the same period last year, this is not the focus. What’s truly noteworthy is that both indicators have shown significant growth compared to Q1. This suggests that the weak performance in Q1 may have been a one-off event rather than a long-term trend. It appears that Tesla’s automotive business is likely to gradually recover in the second half of the year.

Tesla’s total deliveries in the first half of the year decreased by about 7% compared to the same period last year, but the company has not lowered its full-year sales forecast, only stating that the growth rate will be lower than last year. It’s speculated that Tesla’s goal might be to achieve at least 1% growth in deliveries for the entire year, which would require about 7% growth in the second half. Achieving this target would undoubtedly boost Tesla’s market confidence.

The Trade-off Between Price and Volume

Tesla is currently adopting a strategy of sacrificing gross margins to boost sales volume, stimulating car sales through price reductions and low-interest loans. Initially, this strategy appears to be successful. At the same time, the significant increase in green credit revenue provides additional support for Tesla. In a generally sluggish EV market, traditional automakers reduce EV production, which benefits Tesla. This allows Tesla to maintain overall automotive business gross margins while selling cars at more competitive prices.

This strategy may also explain why Tesla doesn’t seem too concerned about potential policy changes, such as the possibility of reduced EV purchase subsidies if Trump is elected. In the dynamic game of the U.S. auto market, a more challenging operating environment might favor Tesla, as competitors’ retreat brings short-term green credit gains and helps improve the long-term market competitive landscape.

Progress in Batteries and Autonomous Driving

Based on this earnings report, rumors about the possible cancellation of the 4680 battery plan seem unfounded. The 4680 battery is still crucial in Tesla’s plan to reduce vehicle production costs. If this plan can be successfully executed, it will significantly enhance Tesla’s future cost competitiveness.

More notably, Tesla announced that it had produced a Cybertruck using dry electrode technology, which could enter mass production by the end of the year. Dry electrode technology is undoubtedly a breakthrough in Tesla’s battery technology, stemming from core technology acquired from Maxwell in 2019. This technology is expected to significantly improve battery energy density and lifespan.

Despite significant progress in Full Self-Driving (FSD) technology in autonomous driving, Musk’s expectations for future Robotaxi operations may be overly optimistic. In the long run, regulatory frameworks in various countries will inevitably become more relaxed, as the social benefits of FSD far outweigh the risks. However, this process will take time and is unlikely to be smooth sailing. From a technical perspective, it’s believed that Tesla’s FSD technology will likely achieve breakthrough progress in the next year or two, reaching a level of autonomous driving capability that can handle 99% of situations.

Low-Price Model and Optimus

Tesla has confirmed that it will launch a low-price model in the first half of next year, which is a positive signal. This model may face challenges beyond expectations as a transitional product between the current production platform and the future next-generation platform. But for now, there seems to be no need for excessive concern. More importantly, this low-price model can be produced directly on existing production lines, helping Tesla’s annual production capacity break through 3 million units. This means that the low-price model could be profitable from the start, avoiding the loss-making sales dilemma that Cybertruck might face in its initial stages.

The progress of the Optimus project also seems relatively smooth. Tesla plans to deploy thousands of robots in its factories starting next year, a significant increase from the previously announced target of 1,000 units. Given Tesla’s technological accumulation in artificial intelligence and automation, they have a good chance of creating a practical humanoid robot.

Unexpected Highlights

In this quarter, the energy business became crucial to Tesla’s revenue growth and profitability. This business segment will likely be the main highlight before the next round of growth in Tesla’s automotive business. In the long term, the prospects for the energy storage device market remain optimistic. As long as there are reasonable expectations for its volatility, the long-term growth potential of this business should not be underestimated.

Conclusion

Although market interpretations of Tesla’s earnings reports often show discrepancies, this report is viewed positively. Key indicators such as stabilizing car sales, declining production costs, energy business growth, progress in FSD and Optimus projects, and the low-price new model advancing as planned all show positive development trends.

In any case, Tesla remains the most competitive long-term EV manufacturer in the European and American markets while also being a major AI giant. This fundamental judgment currently does not need to be changed. However, Tesla’s stock price often reflects high expectations for the future, so even if the company performs well, stock price fluctuations may still be significant. When evaluating Tesla, it’s essential to focus on long-term trends and competitive advantages rather than short-term market reactions.