This time, one of the most important quarterly reports will come when electric vehicle maker Tesla (TSLA) reports its second-quarter results after the bell on Wednesday. The stock has been one of the biggest winners in the market this year, and investors are looking to see if another quarterly GAAP profit can help stocks skyrocket even further. Today, I will take a look at the expectations and break down what I think is most important for this week’s report.
With the Fremont factory closed for almost half the quarter, and China also closed for a short time, production in the period dropped sharply, as seen in the charts below. However, because the company started the period with slightly more inventory than it would have liked, deliveries actually increased sequentially from Q1 to Q2, reaching less than 1,000 vehicles from my quarterly forecast. Lease percentage decreased somewhat sequentially.
(Source: Tesla Q1 release, seen here)
(Source: Tesla Q2 release, seen here)
Unsurprisingly, street estimates for the second quarter have skyrocketed as this year progresses. In late February, analysts thought revenue of more than $ 7.6 billion was possible for this period. Then we saw that the street was getting very bearish, which I thought was wrong, and the second quarter delivery report proved it was right. Some of the estimates for street revenue, like the one still below $ 2.8 billion, are so low that you almost wonder if they are typos or if some analysts just haven’t updated their numbers in several months.
As a result, we have now seen the estimates for the top line jump from their lows, as the table below shows, although the average would be a little higher if it weren’t for that really low estimate. However, it still appears that the street is very low, because the current estimate represents a significant drop in Q1 revenue impression below $ 6 billion. Tesla delivered more vehicles during the second quarter, and the company is going to recognize a bit of total autonomous driving revenue, so I don’t see how the top line will drop that much.
(Source: Alpha Tesla estimates page search, view here)
This time there are so many variables at stake that you are likely to see expectations everywhere. The gradual increase in Model Y in Fremont and China Made Model 3 should benefit the margins of those two vehicles, but price cuts during the quarter will also affect sales prices and margins. Credit sales are always a wild card, and the company is expected to recognize some of its previously deferred self-directed revenue. The dollar also strengthened against some key currencies in the quarter, and the company reached a new battery deal with Panasonic during the second quarter. Work permits, employee pay cuts, and possible debt-to-equity conversions could also play a role in the appearance of the income statement.
It was over two months ago when I first raised the idea that a second quarter GAAP profit was a key target for Tesla. This would allow the stock to meet all the inclusion criteria for the S&P 500, although that does not guarantee that the stock will be added to the index any time soon. For this reason, I believe Tesla management will have tried everything possible to bring the quarter to a positive GAAP net income. Remember, there are plenty of things to play around with here, such as the total amount of auto driving revenue that can be attributed to certain features released during the period. As a result, my “base case” for the quarter is going to show a GAAP gain. Below you can see the three cases that I have projected for the period as I did in previous periods, with dollar values in millions, except per share amounts.
* *The diluted share count will vary depending on the profit and loss situation.
The balance sheet and cash flow situation is where things will get really interesting. The drop in inventory will certainly help, but he also wonders how much the company reduced its accounts payable balances and other liabilities during the quarter with the close of production. Capital expenditures will also be highly focused as Tesla is increasing two vehicles and looking to build new factories. Most expectations seem to be calling for a decrease from the more than $ 8 billion in first-quarter cash, perhaps as much as $ 2 billion in the worst case, but I wouldn’t be surprised if management pulled some levers during the period to limit any cash burn and exceed expectations
It will certainly be interesting to see if management maintains its forecast for over half a million deliveries this year. That will push a monster back half the year, but of course Tesla can always cut prices as we’ve seen recently with the Model Y and S / X / 3 during the second quarter. Over the weekend, Tesla also introduced the Model Y lease in the United States, which was much faster than the Model 3 lease. In China, the transition period ends on July 22, so we could see Big price cuts there if the company wants China’s Long Range 3 to be made below the 300,000 yuan limit.
In the end, investors are watching this week to see if Tesla reports a GAAP Q2 profit that could lead to the inclusion of the S&P 500. I wouldn’t be surprised if the company outperforms analyst estimates, as the street looks very low with its numbers, as we saw with the deliveries. There are several reasons for management to try to print a GAAP Q2 profit, as Q3 will likely see a big impact on Elon Musk’s pay package earnings. Stocks have certainly gone up in recent months as investors look for a possible major index inclusion, but if we don’t see gains it will be interesting to see how many stocks are going down again.
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