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Elevator Pitch
My investment rating for Tesla (NASDAQ:TSLA) is a Hold. In my prior April 18, 2022 update for TSLA, I previewed the company’s Q1 2022 earnings. I analyze Tesla’s recently released Q2 2022 deliveries and production data in my latest article.
Some investors might label Tesla as a Sell after it announced Q2 2022 delivery numbers that were below the sell-side’s consensus projection. But I think that this will be too harsh and unjustified, as TSLA’s June 2022 production has recovered to register a new historical high, and the company had initiated another round of price hikes last month.
I rate TSLA as a Hold. On one hand, I am positive on Tesla’s potential for margin expansion in the future. On the other hand, I am concerned about the degree of TSLA’s reliance on China with respect to both production and sales.
How Were Tesla’s Q2 Delivery Numbers?
Tesla disclosed the company’s metrics relating to deliveries for the second quarter of this year in a press release published on July 2, 2022.
TSLA’s total Q2 2022 deliveries amounting to 254,695 units represented a -18% QoQ decline and a +27% YoY growth. The second-quarter deliveries for Model 3/Y saw a -19% QoQ contraction and a +20% YoY increase to 238,533 units. Model S/X’s deliveries expanded by +10% QoQ and +753% YoY to 16,162 units in the most recent quarter.
In the second quarter of 2022, Tesla registered its first QoQ decrease in deliveries in more than two years or since Q1 2020. TSLA’s deliveries for Q2 2022 also fell short of the market’s consensus forecast of approximately 262,000 units as per S&P Capital IQ. Analysts from Wedbush had highlighted prior to the Q2 deliveries data release that “anything above 260K” will be “viewed positively by the Street” according to a June 30, 2022 Seeking Alpha News article.
Tesla’s below-expectation deliveries for Q2 2022 is mainly attributable to the negative impact of the COVID-19 lockdowns in China. According to estimates by Wedbush’s analysts, TSLA lost around 70,000 units of production from its Shanghai production facility in the recent quarter as a result of disruptions caused by the pandemic lockdowns.
How Do Tesla’s Delivery Numbers Compare To Competitors?
Tesla’s delivery numbers for Q2 2022 were also inferior to the company’s Chinese EV peers in terms of quarter-on-quarter growth, on top of missing consensus as highlighted in the previous section.
A Comparison Of TSLA’s Q2 2022 Deliveries With Its Peers
| Stock | Q2 2022 Deliveries | QoQ Growth | YoY Growth |
| Tesla | 254,695 | -18% | +27% |
| XPeng Inc. (XPEV) | 34,422 | -0.4% | +98% |
| Li Auto Inc. (LI) | 28,687 | -10% | +63% |
| NIO Inc. (NIO) | 25,059 | -3% | +14% |
Source: Announcements from the various companies
TSLA’s -18% QoQ decline in deliveries was much worse than the other Chinese EV companies, XPEV, NIO and LI, as per the table presented above.
But there are positives associated with Tesla’s other metrics (besides deliveries), as I will detail in the next section.
TSLA Stock Key Metrics
In TSLA’s July 2, 2022 press release, the company noted that “June 2022 was the highest vehicle production month in Tesla’s history.”
Tesla’s production increased by +25% YoY and declined -15% QoQ to 258,580 units in Q2 2022; TSLA didn’t provide production figures for June 2022 specifically. A June 10, 2022 article published by Chinese media Yicai Global mentioned that the company’s “gigafactory in Shanghai is back to 100 percent capacity”, and this provides support for Tesla’s disclosure regarding the record-breaking production numbers in June.
Separately, Tesla has recently raised the selling prices of its domestic vehicles in June 2022, according to a June 16, 2022 Seeking Alpha News article.
The price hikes send a strong signal that TSLA has pricing power and that it is able to maintain its profitability by passing on the increase in costs to consumers. Tesla has previously increased the prices for its vehicles in March 2022 and last year as well. As an illustration, the selling price for Tesla Model 3 Long Range has grown by around +23% from $46,990 in early-2021 to $57,990 following the recent price adjustment in June.
What Is Tesla’s Business Outlook?
The key areas of focus pertaining Tesla’s business outlook is the company’s profitability and China.
The sell-side consensus forecasts obtained from S&P Capital IQ point to Tesla’s EBITDA margin rising from 21.5% in FY 2021 to 29.1% by FY 2025.
I think that TSLA can improve its profitability in the medium to long term as per market expectations. Key drivers of Tesla’s profit margin expansion include the ramp-up in production for its Berlin and Texas factories, the increase in the supply of the 4680 battery cells from both its internal production and external suppliers, and the growth in contribution from higher-margin revenue streams like insurance and FSD (Full Self-Driving) software.
On the other hand, China is a critical market for Tesla in terms of both production (i.e. expanded production facilities in Shanghai could produce “2 million” units every year for TSLA) and sales (i.e. China is TSLA’s “second largest market”).
A June 29, 2022 Bloomberg article highlighted that “China president recommits to lockdown-dependent virus strategy” based on recent comments made during his visit to Chinese city Wuhan. This implies that a repeat of the weak Q2 2022 deliveries in subsequent quarters for TSLA due to lockdowns again isn’t out of the equation.
Separately, Tesla’s China sales decreased by -94.7% YoY and -3.9% YoY to 1,512 units and 32,165 units in April 2022 and May 2022, respectively as a result of lockdowns in the country. If China’s COVID-zero policy turns out to have a greater-than-expected negative impact on the Chinese economy and dampens demand for EVs, Tesla’s future revenue growth might disappoint investors.
Is TSLA Stock A Buy, Sell, or Hold?
I rate TSLA’s stock as a Hold. I have analyzed Tesla’s delivery, production and pricing data, and I have also evaluated TSLA’s outlook considering both the company’s margin improvement potential and its reliance on China. I come to the conclusion that the current risk-reward for Tesla is fair, warranting a Hold rating.
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