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Tesla’s not-too-bad quarter and why Elon Musk thinks you can “mint money” as a lithium refiner

21 Jul 2022

Despite hiccups in 2Q, Tesla is sticking to its target of growing production by 50% this year.

Tesla Elon Musk 2Q22

What happened?

Tesla reported its 2Q22 results after the market closed on 20th July. 

Earlier, we learnt that it delivered 254,695 vehicles in 2Q22 as it was impacted by Covid-related lockdowns in Shanghai, China. 

What investors may like about the latest results was that earnings per share in the second quarter was at $2.27, beating market expectations of $1.91. 

This was driven by a decent operating margin of 14.6% in 2Q22. While this was down from 1Q22 operating margin of 19.2%, it remained higher than the margin achieved in 2Q21.

Tesla also achieved positive free cash flow (FCF) of $619 million in 2Q22. 

What we learnt from Tesla results

#1 – Demand for EVs remain healthy

The question at the back of every investor’s mind is whether demand for EVs has been impacted by recession concerns. 

However, Tesla does not seem to have been much affected so far.

When asked about whether there has been any impact on demand, management of Tesla said “Not that I can tell. Maybe a little.”

That’s a relief for many who might have expected that the price hikes Tesla had put through would have led to weaker sales. 

#2 – Focused on ramping up production

Tesla overcame earlier production difficulties to end the second quarter with the highest vehicle production month in its history. 

As a result, the company is still sticking to its target of a 50% growth in production this year. 

While Musk admitted that the target is now more challenging to achieve, it still remains possible if they are able to execute well. 

Interestingly, he noted that Tesla has “a good chance of exiting this year at 40,000 vehicles a week.”

That will translate to close to 2 million units per year, effectively filling its current installed capacity of 1.9 million units. 

And you can be assured that Musk and his team have their attention on making sure that production targets are met. 

Recognising that challenges lie largely on production, Musk shared that for anyone who orders a Tesla EV today, it’ll only arrive sometime next year.

Putting himself in the shoes of the customer, Musk finds that annoying too. 

It'd be like go to a restaurant and you order a burger and you have to wait 3 hours and like, that's annoying. You want to get your burger right away. Same with the car. So we want that lead times to reduce.” - Elon Musk

#3 – Cost of raw material starting to come down, but lithium price remains “insane”

The rising cost of raw materials has been a key concern for investors. It has also led Tesla to raise prices for its electric vehicles. 

Encouragingly, Musk shared that the cost of carbon steel and aluminium has started trending down.

As a result, he expects to see the benefits of falling costs later this year or early next year. 

However, there are still some commodities where the price remains high. One of them is lithium, where he called the pricing “insane” 

It was shared that the price of lithium has shot up from $11 a kilogram to more than $80 a kilogram. 

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As a result, he has strongly urged entrepreneurs to enter the lithium refining business. 

While lithium is very common, it has to be refined into battery-grade lithium carbonate and lithium hydroxide, which is extremely high purity. 

“So I would really like to encourage, once again, entrepreneurs to enter the lithium refining business. You can't lose. It's a license to print money.” – Elon Musk

#4 – Tesla’s “best product ever” is coming next year

If you are eagerly anticipating Tesla’s next big product rollout, Musk shared that he is still expecting to start production on the Cybertruck in the middle of next year. 

It was hard to conceal his anticipation of the rollout. 

He shared that “we're very, very excited about that product. I think it might actually be our best product ever.”

 

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Source: Tesla

#5 – Tesla has sold off most of its Bitcoin holdings

For those who are concerned about whether Tesla has to take a huge loss on its crypto holdings, there might be comfort in knowing that it has sold off most its Bitcoin. 

Musk shared that this was done to improve the overall liquidity of the company, given COVID shutdowns in China.

Hence, he emphasized that this should not be taken as some verdict on Bitcoin, as Tesla remains open to increasing its Bitcoin holdings in future. 

Musk, who is known to have a liking for Dogecoin, noted that Tesla has not sold any of its Dogecoin. 

Contrary to his frequent Twitter comments, Musk emphasized that cryptocurrency is not something Tesla thinks about a lot. 

“Tesla’s goal is to accelerate the advent of sustainable energy, … and cryptocurrency is a side show to the sideshow.” – Elon Musk

Why should we care?

The second quarter is seen by some investors as the low point for Tesla this year, given the lower production in Shanghai and the ramp-up of its to two new factories. 

Tesla’s ability to navigate these challenges and achieve a higher margin compared to the previous year might provide some comfort about its execution capabilities. 

Looking forward, it might be worth looking out for whether its production is able to catch up in the remaining months of the year.

This will be key to whether it is able to turn its new factories from a loss to generating profit growth over time. 

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