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Wall Street is not loving Tesla’s Q2 2023 numbers, and the high-flying stock is now feeling the sting, with the company’s shares down around 7 percent. Tesla bulls did try to shape the narrative around the company’s record quarterly revenue of nearly $25 billion but were outmatched by the EV giant’s shrinking margins, perplexing inventory accounting, and Cybertruck-related reality check.

$TSLA Q2 results look bad. Headline is that adj-EPS beat by 13.7%, but look at the huge $328m one-off in non-operating income ($0.09/share).

Strip that out & Q2 was in line. EBIT actually missed consensus by 7.7%. pic.twitter.com/k8l0PKgZER

— Motorhead (@BradMunchen) July 19, 2023

Tesla managed to beat consensus expectations for adjusted EPS expectations by over 13 percent. Yet, this beat was entirely due to a one-off non-operating income of $328 million. What’s more, Tesla’s Earnings Before Interest and Taxes (EBIT) actually missed consensus expectations by over 7 percent.

What’s Going on With Tesla’s Margins?

Q2 Gross Margins excluding regulatory credits came in at 18.1% easily above Dan's "line in the sand" margin of 17.5%. $TSLA https://t.co/wkO2banbuj pic.twitter.com/24rge65SyR

— THE ACCOUNTANT (@CPAinNYC) July 19, 2023

Tesla’s automotive gross margin (ex-regulatory credits) fell to 18.10 percent in Q2 2023 from 19.0 percent in Q1 2023 and 26.20 percent in Q2 2022.

The company had continued to aggressively cut prices toward the beginning of the second quarter of 2023. In the US, the entry-level Model 3 saw price cuts of around 6 percent, while the lowest-priced Model Y was discounted by around 8 percent. The EU also saw similar cuts of between 5 and 10 percent. When coupled with the higher weight of Model 3 and Model Y in China’s sale mix, Tesla’s ASP should have declined much more than the 1.3 percent quarter-on-quarter drop that the company just reported. One reason behind this incongruence could be the company’s much more liberal recognition of deferred FSD revenue.

Toward the latter half of Q2, when Tesla began to slightly increase the prices of its EVs in multiple markets, analysts assumed that the era of aggressive price cuts was finally over. However, in the latest earnings call, Elon Musk noted that he remained willing to sacrifice profit margins to drive volume growth, banking on the eventual solution to the FSD conundrum to drive much higher profits in the long run. This suggests that more price cuts might be in the offing.

How was $TSLA Q2 inventory of $14.4bn -0.1% versus Q1 while production outstripped deliveries by 13,560 vehicles?

— Motorhead (@BradMunchen) July 19, 2023

As another anomalous case, consider the fact that Tesla valued its inventory at $14.4 billion, constituting a quarter-on-quarter drop of 0.1 percent even as production exceeded deliveries by 13,560 units.

Last year in Q2 2022, there was a step change in Energy margins (a jump to 11.2%).

This Q2, there is another step change with Energy margins (a jump to 18.4%).

We're going to have to pay attention to Energy!$TSLA pic.twitter.com/lV3sQAAaYF

— THE ACCOUNTANT (@CPAinNYC) July 19, 2023

Of course, not all was doom-and-gloom in Tesla’s margin story for Q2. The company’s energy margins are finally leading the pack, having computed at 18.40 percent for the period.

The Cybertruck Disappointment

Analysts like the Future Fund’s Gary Black have continued to pin their hopes on the much-delayed Cybertruck to unlock the next growth spurt for Tesla. Just ahead of the earnings release, Tesla announced that it had commenced the production of this profit-critical vehicle.

This will disappoint the fans. After Tesla touted "First Cybertruck built at Giga Texas!" in a tweet this past week - shareholder deck says the company is only producing “release candidate” builds so far.

— Lora Kolodny (@lorakolodny) July 19, 2023

However, courtesy of the company’s just-released earnings, we now know that the company is only producing “release candidate” builds, with formal production slated to commence only later this year at Giga Texas. Volume production is not expected until 2024.

Source: https://www.nasdaq.com/market-activity/stocks/tsla

For a stock that is the hallmark of a frenzied growth story, the slowing momentum on margins is going to take a hefty toll. Hence, the weakness in Tesla shares today.