Tesla just came out with its eagerly awaited second quarter financial results, and Wall Street was not pleased with what it heard. The company reported a loss of $408 million, or $2.31 per share. Adjusted for one-time items, it comes out to a loss of $1.12 a share. Analysts had expected a much smaller loss of about 40 cents per share.
Tesla share prices dropped 11 percent in after-hours trading after the announcement. Investors were not only spooked by the loss, but also by recent reports that sales of Tesla's Model X and Model S cars had begun dropping in California, a key market for the company, as well as its home state. To make matters worse, CEO Elon Musk announced during the earnings call that CTO JB Straubel was stepping down to an advisory role after 15 years. "If we hadn't had lunch in 2003, Tesla wouldn't exist, basically," Musk said while praising Straubel and thanking him for his years at Tesla. Which was a nice thing to say, but a bad way to inspire investor confidence.
In view of these results, are there legitimate reasons for analysts and investors to be bearish about Tesla? Sure there are. But the negative headlines and the falling stock price are failing to recognize some really good news as well. Consider:
1. Tesla made record deliveries.
That's another quarter of record vehicle deliveries, after hitting records in the third and fourth quarters of last year. One of the company's biggest challenges has been the need to ramp up production, and it's been meeting that challenge effectively. Thus, although losses were bigger than expected, total revenue was almost in line with expectations, at $6.35 billion compared with an expected $6.41 billion.
What that's telling us is that the dropoff in Model X and Model S sales is being matched with an increase in Model 3 sales, which makes sense considering that the Model 3 is a newer model, more often in the news, and more affordable. Unfortunately, the Model 3's affordability--especially now that Tesla has begun selling a long-promised $35,000 base model--is squeezing the company's profit per car sold, which went from 20.2 percent in the first quarter to 18.9 percent in the second quarter.
Musk has been trying to solve this profitability problem with two rounds of layoffs and the closure of some retail stores. He'll have to keep working on it, perhaps by getting more buyers to opt for Tesla's Autopilot feature, which basically costs the company nothing but brings in a few thousand dollars per vehicle.
The record number of deliveries should also reassure anyone who worried that the phasing out of federal government incentives, which began for Tesla this year, would dampen sales. And while the phaseout is bad news, it results from the good news that the company has sold more than 200,000 cars.
2. Things are trending in the right direction.
Whatever you think of Tesla's second quarter, there's just no denying that the company is moving in the direction investors should want it to go, as these charts (scroll down) make clear. Consider the second quarter of last year, when the company had $4 billion in revenue and a loss of $3.06 per share. Growing production and the fact that construction of its factory in Shanghai is proceeding (which may help Tesla avoid import tariffs) should further help things along.
You may remember that the first quarter of 2019 was pretty damned awful, with the company announcing a drop in deliveries and losses of $702 million. Much of that was attributed to rounds of layoffs and other cost-cutting measures, the challenges of beginning sales to China and Europe, and what Musk termed "production hell." This past quarter's results suggest that the first quarter of 2019 was an anomaly and that things may be getting back on track.
3. Tesla has more cash than ever before.
Remember all those stories about how Tesla was on the verge of running out of cash? That's not so much a worry anymore. The company raised around $3 billion in capital in May, and its record deliveries and "operational improvements" generated $614 million in free cash flow. That means Tesla now has $5 billion in cash, the most ever in the company's history.
Tesla skeptics are pointing to the company's prediction that it would deliver between 360,000 and 400,000 vehicles total in 2019, which it has just reaffirmed. As some have pointed out, slow deliveries in the first quarter mean it may need two more record quarters to make that plan come true. Then again, once the Shanghai plant begins delivering cars to the world's biggest electric vehicle market, Tesla might easily see more record quarters.
Whether it will actually reach at least 360,000 deliveries in 2019 is still an unknown. But, frankly, whether or not the company lives up to that prediction, long-term investors should be relatively pleased with today's results. There's a lot more to like there than Tesla's stock price slide suggests.