24 July 2024
If you are covering Tesla’s Q2 results, please see a comment below from Mamta Valechha, equity research analyst at Quilter Cheviot:
“Tesla’s Q2 results, released last night, paint a challenging picture for the automotive giant. Automotive revenues fell by 6%, driven by reduced pricing and a 5% decline in volumes of the Model S/Y. This has put significant pressure on operating margins, which dropped 333 basis points to 6.3%, falling short of the expected 7.6% and ranking among the lowest in the automotive industry.
“During the earnings call, Tesla refrained from reiterating its previous guidance on growing automotive units this year. Instead, the company highlighted ongoing margin pressures due to potential tariffs in Europe and new financing programs aimed at boosting demand. The introduction of lower-cost models announced in Q1 will not see meaningful availability until H2 2025, raising concerns about whether these model refreshes will be sufficient to stimulate demand, especially as competition intensifies in key markets like China.
“Tesla’s core automotive business is clearly under strain, and it’s no surprise that Elon Musk is shifting focus towards AI. However, there are significant questions about whether Tesla will end the year with positive free cash flow. We see no immediate catalyst for a material improvement in profitability in H2.
“Looking ahead to 2025, the arrival of more affordable models could further dilute margins. Additionally, the potential removal of IRA incentives poses a clear threat to Tesla’s cash generation capabilities, which are crucial for funding its ambitious AI initiatives.
“Given these challenges, we remain cautious. While the stock has performed well recently, driven by AI sentiment, the underlying pressures on Tesla’s auto business cannot be ignored. This is particularly concerning for the company’s future growth prospects. Therefore, we advise staying on the sidelines for now.”
