Record-Breaking Deliveries and Challenges in the Chinese Market

Tesla Inc. (NASDAQ:TSLA), the pioneering electric vehicle (EV) manufacturer, is poised to release its Q2 earnings following a record-breaking quarter for deliveries. This report examines Tesla’s financial health and valuation prospects in light of these developments.

Tesla’s Q2 performance was characterized by record sales, particularly in China, but it also underscored the escalating competition in the EV market. The company reported a 10.2% increase in deliveries from the first quarter, totalling 466,140 units. China, a crucial market for Tesla, accounted for over half of its global sales, with wholesale deliveries reaching 93,680 units, as per the China Passenger Car Association (CPCA). This signifies a remarkable 120% surge compared to the same quarter last year.

However, Tesla’s supremacy in China is being challenged by domestic competitors. Four local companies have outperformed Tesla, selling nearly double the number of EVs. Moreover, Tesla’s month-on-month gains were the least among its competitors, with a modest 6.4% increase from May. Notably, these figures exclude the over 120,000 hybrid vehicles sold by Warren Buffett-backed BYD Company Limited (OTCPK:BYDDF).

Financial Health and Valuation Concerns

Investors are keenly awaiting Tesla’s Q2 earnings report, due on 19 July, to assess the impact of these developments on the company’s financial performance. Despite the impressive delivery figures, Tesla’s revenue growth has been lagging. Last quarter, a 4.3% increase in deliveries was accompanied by a 6.3% decline in automotive revenues. Given the recent trends, revenues are expected to remain flat, despite a 10.2% surge in deliveries.

One of the primary concerns for Q2 is the impact of Tesla’s price cuts on its revenues. While the strengthening of the U.S. dollar against the Yuan could offset some of the losses, the price cuts could still pull revenues down. Furthermore, the company’s operating margins have been declining for three consecutive quarters, from 17.2% to 11.4%. If this trend persists, Tesla could face negative cash flow.

Tesla’s inventory management is another issue. The company has been producing excess vehicles for five consecutive quarters, leading to a stockpile of 91,000 vehicles worth around $3.5 billion. The recent delivery figures would add another $500 million to this total, further straining the company’s working capital and impacting its free cash flow.

Potential Challenges and Valuation Considerations

The looming threat of protectionism and nationalism also casts a shadow over Tesla’s valuation. The escalating tensions between the U.S. and China, particularly in the chip market, could have significant implications for Tesla. If the situation worsens, Tesla, like other U.S. companies, may have to halt operations in China. Additionally, as China’s domestic EV industry grows, the government could reduce subsidies for foreign brands, further challenging Tesla’s position in the market.

Tesla’s current price/earnings ratio stands at 83X, with a forward ratio of 58X. These figures could rise further if the stock price surges and earnings per share decline in the Q2 release.

While these valuations were justifiable when Tesla was a burgeoning company with little competition, the situation has changed. Tesla is now a mature company facing stiff competition, particularly in China, which accounts for half of its sales.

In conclusion, Tesla’s Q2 earnings and financials could potentially disappoint. Investors may want to consider diversifying their portfolios with other promising EV stocks.