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The market is having a very negative reaction to Tesla's 2019Q2 earnings release.
We think the market is mistaken - here are our three key takeaways from the earnings release & call.
1. Remarkable financial discipline
Tesla's opex declined 7% vs 2019Q1 despite deliveries growing 51%. Cost base is at critical mass. This bodes incredibly well for earnings in 2020 when China & Model Y production begins in earnest at an even higher gross margin than Model 3.
2. Model 3 now sustainably profitable
A key question was whether Model 3 gross margin will deteriorate once the Standard Range Plus variant (the cheapest option) is available globally. Even though this rollout happened at the end of Q1, with a corresponding impact on mix & ASP, normalized auto gross margin actually improved sequentially in Q2 vs Q1. Furthermore, Model 3 ASP is now stable. This is a meaningful milestone for Tesla.
3. Planning for continued exponential growth
Some wonder whether growth will stall from here as Model 3 production is finally at scale. Elon Musk answered that yesterday, with his reference to Terawatt-hr scale battery production plans.
For the sake of sustainable energy consumption, there is a mind-numbing amount of gas cars (1.5B+) that need to go, despite Tesla's success so far, they haven't made a meaningful dent in replacing them. But the company isn't standing still: it has a terawatt-hr scale plan.
The combination of autonomy - which would dramatically increase the unit economics of Tesla's business - and Terawatt-hr scale production - which would increase volume by 30-100x - could lead to some truly extraordinary wealth creation.
We will follow up with a more detailed analysis of Tesla's Q2 earnings!
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