Tesla Q2 earnings preview: 30% drop in EPS likely for EV giant amid strategic challenges

Tesla Inc is set to release its financial results for the second quarter of 2024 after the market closes on Tuesday, July 23.

Wall Street anticipates a mixed performance, with significant year-over-year declines in earnings but modest revenue growth.

This earnings preview delves into the expected results, key metrics, and strategic challenges facing the electric vehicle (EV) giant.

Tesla’s decline in earnings per share and net income

Tesla is projected to report earnings per share (EPS) of $0.62 for Q2 2024, a notable decline from $0.91 in the same period last year.

This represents a more than 30% drop in EPS, reflecting increased costs related to restructuring and research and development.

Net income is expected to be $1.73 billion, down from $2.7 billion in 2023. These figures underscore the financial strain Tesla faces amid efforts to innovate and expand its product offerings.

Revenue growth amidst EV price cuts

Despite the decline in earnings, Tesla’s revenue is expected to rise slightly by 0.8% year-over-year to $25.1 billion.

This growth comes even as the company has implemented a series of price cuts across its vehicle lineup to stimulate demand.

These price reductions have put pressure on Tesla’s margins, which have seen significant contraction in recent quarters.

In the first quarter of 2024, Tesla’s gross margins more than halved to 5.5%, down from 11.4% in the same period in 2023.

Investors will be closely monitoring the Q2 margin figures to assess whether the company has managed to stabilize its profitability despite the aggressive pricing strategy.

EV deliveries down 5%

Tesla delivered 443,956 vehicles in Q2 2024, exceeding Street estimates but still representing a 5% decline compared to the previous year. Production for the quarter stood at 410,831 vehicles, about 7.5% less than deliveries.

This is a shift from Q1 2024, where production outpaced sales, leading to a buildup of inventory.

Tesla’s global vehicle inventory, measured in days of supply, rose from 15 days in Q1 2023 to 28 days in Q1 2024.

However, the inventory metric is expected to decline in Q2 as the company adjusts its production to better align with demand.

Challenges in the EV market

Several factors have been dampening demand for Tesla vehicles. High interest rates have made it more expensive for customers to finance their purchases, reducing affordability.

Additionally, the effects of Tesla’s aggressive price cuts are beginning to wane, and competition is intensifying, particularly in key markets like China.

Local manufacturers in China offer compelling EVs at attractive price points, challenging Tesla’s market share.

Furthermore, the EV market is seeing a saturation of early adopters, leading to lower demand growth. Tesla’s challenge now is to attract a broader customer base, which may require further innovation and strategic adjustments.

Tesla’s margins under pressure

Tesla’s margins have been a focal point of concern. In Q1 2024, the average price of Tesla vehicles fell to under $45,000, down from approximately $47,000 in the same quarter last year.

This price reduction, coupled with increased production costs, has significantly squeezed margins. Gross margins for Q1 2024 were 17.4%, down by about 200 basis points compared to the same period last year.

For Q2, margins are expected to remain under pressure as Tesla reduced prices of its Model Y, Model X, and Model S vehicles by around $2,000.

The impact of these price cuts on Tesla’s profitability will be a critical metric for investors.

Can Robotaxis turn the tide?

Despite the immediate financial challenges, Tesla continues to focus on long-term growth and innovation. One area of interest is the development of its autonomous taxi platform, known as Robotaxis.

CEO Elon Musk confirmed that the anticipated debut of these vehicles, originally scheduled for August 8, has been postponed.

Investors will be looking for updates on this initiative, which is seen as a potential game-changer for Tesla’s future revenue streams.

Moreover, Tesla’s stock has experienced significant volatility. After a massive sell-off amid concerns about waning EV demand, the stock has surged by almost 40% in the last month, buoyed by better-than-expected Q2 deliveries.

The stock’s performance in the near term will likely hinge on how Tesla’s actual results compare to these expectations.

Competitive landscape and market positioning

Tesla faces increasing competition from both established automakers and new entrants in the EV market. In China, local brands are gaining traction, offering high-quality EVs at competitive prices.

This competition has forced Tesla to continuously innovate and improve its product offerings to maintain its market position.

Tesla’s strategic initiatives, such as expanding its charging infrastructure and enhancing its vehicle software, are critical to maintaining its competitive edge.

The company’s ability to leverage its technological advancements and scale production efficiently will determine its success in the increasingly crowded EV market.

TSLA has been volatile

Tesla’s stock has been on a roller-coaster ride. From early January 2021 to around $260 now, the stock has seen gains of 10%, compared to a 50% increase for the S&P 500 over the same period.

Source: TradingView

The stock’s performance has been highly volatile, with returns of 50% in 2021, a drop of 65% in 2022, and a rebound of 102% in 2023. This volatility reflects the broader market dynamics and Tesla’s unique position in the EV industry.

Analysts remain divided on Tesla’s future prospects. Some believe that the company is well-positioned to benefit from the long-term transition to cleaner transportation and energy generation.

However, others caution that high interest rates, lack of extensive charging networks in many countries, and falling resale values for EVs could pose significant challenges.

For valuation, some analysts, like those from Trefis, value Tesla stock at $177 per share, which is below the current market price.

This conservative valuation reflects concerns about Tesla’s ability to sustain its growth trajectory amid increasing competition and market saturation.

Tesla’s Q2 2024 earnings report is expected to highlight both the opportunities and challenges facing the company.

With a projected 30% decline in earnings per share and a modest revenue increase, the results will provide critical insights into Tesla’s financial health and strategic direction.

Investors will be keenly watching key metrics such as margins, vehicle deliveries, and updates on strategic initiatives like Robotaxis.

Tesla’s ability to navigate the competitive landscape and address the evolving market dynamics will be crucial for its long-term success.

As Tesla continues to innovate and expand its product offerings, the company’s performance in the coming quarters will be closely scrutinized by investors and analysts alike.

The upcoming earnings report will be a pivotal moment for Tesla, setting the stage for its future growth and market positioning.

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