Putting aside the scandal surrounding CEO Elon Musk, Tesla (NASDAQ:TSLA) has reported another outstanding quarter. The revenue and profitability of the second quarter of 2022 were lower than the previous two quarters but significantly higher than the same period in the prior year. As vehicle production in factories around the world gradually increases, profits are on the rise. This does not necessarily make the stock a buy, but Tesla (NASDAQ:TSLA) continues to demonstrate its automaking prowess.
A year-over-year increase in margins when regulatory credits are excluded
In the second quarter of 2022, Tesla’s gross profit margin on automobiles was reported at 27.9 %. This compares to the stellar gross margin of 32.9 % in the first quarter of 2022 and, more importantly, the gross margin of 28.4 % in the second quarter of 2021. Cue the music signaling Tesla’s impending demise. There are, however, a few caveats to consider regarding this vehicle’s gross margin figure. Several factors combined to reduce Tesla’s vehicle profit margins.
First, there were restricted operations at Tesla’s Shanghai factory, where authorities are attempting to maintain tight control over the resurgence of COVID-19 infections. Inflation and the strength of the U.S. dollar (which reduces revenue when a multinational company tries to convert foreign currency for financial reporting in the United States) also contributed to the decrease in gross vehicle margin. In addition, Tesla (NASDAQ:TSLA) produced more vehicles than it delivered in the second quarter, compared to the previous three quarters, when it delivered more than it produced.
Tesla does not realize revenue until a customer takes possession of a vehicle, so the ratio of quarterly production to deliveries impacts margins.
But there is an additional factor to consider. Tesla’s regulatory credit earnings (electric vehicle incentive schemes from governments given to Tesla (NASDAQ:TSLA) and bought from Tesla (NASDAQ:TSLA) by other automakers) continue to decrease. It was always inevitable that the sale of these credits would drop as automakers expanded their own EV lineups.
In the second quarter of 2022, regulatory credit sales generated $344 million in revenue, a decrease from the $679 million generated in the first quarter and the $354 million generated a year earlier. Consequently, regulatory credits accounted for only 2.4% of automotive revenue during the most recent quarter, compared to 4% in the first quarter and 3.5% in the second quarter of 2021.
Excluding these credits, the automotive industry’s gross margins in the second quarter of 2022 will increase to 26.2% from 25.8% in the same period of the previous year (and a 30 % gross margin in quarter 1). Not quite as dire as some financial media outlets portray.
The quarterly profit will fluctuate for Tesla, but…
Tesla (NASDAQ:TSLA) recorded a profit margin of $2.46 billion for the previous quarter, excluding vehicle-specific margins. The resulting operating margin is 14.6%. It is a significant decrease from the unusually high 19.2 % margin in the first quarter but a significant increase from the 11 % margin a year ago.
Various profit margin metrics will be highly variable from one period to the next for all manufacturing companies, but especially for Tesla (NASDAQ:TSLA) as it attempts to expand its global EV production rapidly. Over time, one should prioritize metrics such as free cash flow per share (operating profit minus expenditures on property, plant, and equipment). This endeavor has been a complete success thus far.
It is not certain that Tesla (NASDAQ:TSLA) should be bought. It simply is not a stock for everybody, because Musk and Company can be very unpredictable at any given time. And shares are trading at 133 times, dragging 12-month free cash flow, a premium reflecting the company’s ability to continue growing its cash-generating potential for many years. As the automaker scales up its operations, Tesla (NASDAQ:TSLA) meets or exceeds expectations on several fronts.
Featured Image: Megapixl © Sheila2002
