Tesla Beats Q2 Delivery Estimates by 2% & Stock is Up by 10%--Gift for Short Sellers

Stock is up 27% in 6 trading days in possible anticipation of a beat, which was only 2%. Now Q2 earnings is the next catalyst and it may not be positive

Jul 03, 2024

Tesla saw its Q2 global car sales fall by 4.8% YoY after an 8.5% YoY drop in Q1. This is the first-ever 2-consecutive quarters of annual declines for Tesla.

Despite two annual declines in quarterly car sales, Tesla still trades like a growth stock with a 2025 PER of 70x based on consensus estimates. The stock rose by 15% going into the Q2 delivery report over the prior five trading sessions and rose by another 10% after the results were reported this morning.

Imagine a 10% rally on a 2% beat (totally normal stuff when you’re in an “Everything Bubble”). While Tesla’s Q2 deliveries of 443,956 vehicles were 2.4% above consensus estimates of 433,397, it should be noted that consensus dropped by 8% since mid-April. If those estimates hadn’t dropped, Tesla’s Q2 deliveries would’ve missed by 7%. Figure 1 from Bloomberg below shows how much Q2 2024 delivery estimates have come down over the past 12 months and accentuates how ridiculous this celebratory 10% rally in Tesla’s stock was today.

Figure 1: Tesla’s Q2 2024 Delivery Consensus Falls by 20%

Earnings Implications of Q2 2024 Delivery Results

Lowest Capacity Utilization on Record: Aside from covid-related plant shutdowns in Q2 2020 and Q2 2022, Tesla’s Q2 2024 production of 410,831 amounted to only 68% capacity utilization (see Figure 2 below) which marks a record-low for Tesla in normal times. Anything below 80% is roughly break-even in terms of profits and below 70% is usually loss-making, although Tesla has yet to generate losses due to their accounting methods. Nevertheless, while deliveries might be up in Q2 versus Q1, operating rates at such low levels are unhealthy for profits.
Q2 Price Cuts Point to Limited Profit Upside: Tesla used a combination of price cuts and low-interest-rate loans in Q2 to get rid of its burgeoning worldwide inventory. Assuming this led to a 3% QoQ decline in average prices (this is a generous assumption given the 10% discounts on new car inventories in many countries) and an equal drop in unit costs, Tesla should only see a 6% QoQ rise in operating income and a 4% rise in non-GAAP EPS to $0.46 in Q2 (this is 19% below consensus estimates of $0.57). I’ll have my Q2 earnings estimates out next week.
Inventory Reduction is Big & Should Be Positive for Q2 FCF: Tesla had a Q1-end inventory of 144,049 vehicles which was reduced by 23% QoQ in Q2 to 111,284 cars. While this is still a massive amount of inventory to have on hand (current Tesla inventory equates to 28% of Q2 deliveries) it should be positive for free cash flow (FCF) in Q2. I’m estimating COGS/unit of $36,000 in Q2, so this implies a $1.2 billion positive impact on Q2 FCF just from the reduction in inventories.

Figure 2: Tesla’s Capacity Utilization at a New Low in Q2

No Change to the Gloomy Outlook for Tesla

Despite the 27% rally in Tesla’s stock over the past 6 days (which amounts to a $234 billion increase in Tesla’s market cap, or 72% of Toyota’s market value), the outlook for Tesla is still bleak, if not worse than that 3 months ago.

First and foremost, I always ask this question to anyone who thinks that the recent quarter was the bottom for Tesla earnings: If Tesla needed huge price cuts to move the metal last quarter, why won’t they need it this quarter or in every quarter until they come out with replacements for the Models 3 and Y which are 95% of production capacity?

With that in mind, these are the main negatives that the Tesla bulls can’t argue their way out of without mentioning “robotaxis” or “humanoid bots”:

No Bottom in Sight for a Stop to Heavy Discounting and Price Cuts: Tesla has already started Q3 with continued zero-interest-rate loans in China. The “refreshed” Model 3 needs incentives in China and the EU. The same will happen with the Model Y “refresh” in 2025. There is no end to the pull on Tesla’s profitability until they can launch a model (or two) that can be higher-priced and cover for losses in the Model 3 & Y’s decline.
New Car Prices Starting to Drop Globally: This is alarming if you have a big position in any auto stock, let alone Tesla (which is why Warren Buffet is likely selling BYD at a faster pace). Toyota is the strongest in terms of pricing power (due to its diverse lineup with affordable hybrids) and Tesla is the weakest. Just like luxury goods sales, expensive car sales have screeched to a halt in the past 2 to 3 months. Expect Tesla to drop prices further from here on.
Full Self-Driving (FSD) is the Anchor of Tesla’s Stock Price: If you look at Figures 4 and 5 below, you’ll see how Tesla trades at higher valuations—despite lower growth—than any carmaker or AI stock in the “Magnificent 6”. This is due to the market still being in “bubble territory” (look at zombie stocks like Carvana being up 141% YTD). The tech-heavy Nasdaq 100 is up 19% versus Tesla’s 7% decline this year. If the “Mag 6” drops, so too will Tesla, especially if Tesla burns more cash (a likely prospect if they continue buying boatloads of Nvidia chips). Figure 3 shows the 3.5-year downward trend that Tesla is now up against with record-high valuations.

Figure 3: Can Tesla’s Stock Break Out of its Downward Trend?

Lots of Pain Among Tesla Bears Right Now

I started Q2 with a small short position and raised it by 70% today (my last report here warned that we could get to $220 or higher on the upside). I’m convinced that Tesla—the first carmaker in over 50 years to have no new models for over a 2-year cycle—won’t survive in its current shape or form given the competition. But I also warn that being short any stock will have its “ups & downs”. Especially if it’s Tesla, which is basically a “large-cap meme stock”, so trade carefully.

There’s a reason why carmakers trade at 7x forward earnings versus Tesla’s 70x: If you’re a carmaker and screw up on new model launches, you’ll blow holes in your balance sheet and likely won’t be able to raise money (Nissan, GM, & Chrysler are recent examples as I summarized in this report). I’m confident that this is what we’re seeing with Tesla right now, but only those who’ve witnessed carmakers go bankrupt realize it (most Tesla investors have only seen markets go up since March 2009). And the only reason Tesla hasn’t dropped to $50 or less is because Musk keeps dangling “AI” and “Robotics” to the unsophisticated retail investors who will likely be the victims of a rug pull.