Tesla falls sharply on Q2 earnings report, long-term outlook and flexibility remain optimistic

Let’s admit it was only a matter of time before the “rest of them” caught up to Tesla. In a way, Tesla was always a proof-of-concept experiment, testing the unknown waters of an EV driven world. Would it work? Would people want one?  What about the infrastructure? Uncovering the answers to these questions was always something to which the rest of the automotive industry was too scared to commit. 

Yes, we’re looking at you GM. Your EV1 broke our hearts… 

But when it comes to investing, the old adage about eggs and baskets means, as other EV makers finally begin to catch up, Tesla is already making its next moves.  Variety, after all, is the spice of life, and businesses which fail to keep up with the times--or in this case lack the foresight to shape them—are poised to fade from dominance as they rest on the laurels of previous success.

And this is where Tesla finds itself at a crossroad.  On one hand, investors need to accept the fact that an electric car is simply a car, and the likes of Audi, Volvo, Porsche, and Lexus are equally—and in many ways more—skilled at building a car than Tesla. And maybe that is the real story behind Tesla’s ($TSLA) solidly disappointing second quarter performance this year.

Looking at just the numbers, investors will find an array of red flags, some of them quite serious. Revenue is down (-4.8%), profits are really down (-34%), production is down (-14%), and for the first time ever, Tesla’s overall EV market share has fallen to less than half (49.7%). It is this statistic that is the most striking, as it represent a single-year EV market share loss of over 10%.

Yes, the competition has arrived. 

Combine these numbers with Tesla’s announcement of a 10% workforce reduction last April, and the Tesla story is starting to lose some luster. Meanwhile, Ford and General Motors have seen their EV sales skyrocket with 2024 Q2 electric vehicle sales increases of 61% and 40% respectively.

Again, it was only a matter of time before EV customers started checking out the competition, and let’s be honest, some of those offerings are pretty attractive!

Factor in the prospect of a Republican-led government this fall, and the outlook gets increasingly bleak.  Last year Tesla announced plans for a new factory in Mexico, and despite Musk’s outspoken support for former President Donald J. Trump, it’s possible a Republican-led administration would not only impose international tariffs on those cars, but would also prove to be, let’s just say, “less sympathetic” to the kinds of green initiatives that bolster much of the EV industry at large.  For instance, Tesla sold $890 million in accumulated carbon credits last quarter, up from $442 million the quarter before, and up from $282 million a year earlier.  Because these carbon credits cost Tesla nothing, 100% of the cash generated from these sales goes directly to Tesla’s bottom line. In fact, carbon credit sales are an integral part of their entire business model. However, a less eco-friendly administration may seek to change such incentives, threatening Tesla’s future viability even further. While it would be easy for the mainstream manufacturers to temporarily pivot away from EV’s, for Tesla these kinds of regulatory headwinds may prove disastrous.

At the moment though, fear not. Tesla is still the Apple Inc. of the automotive industry. Their innovative and visionary style lies at the forefront of their consumer appeal. Like Apple, Tesla was the first, and like Apple, Tesla is still viewed by many as the experience money can buy. But as an increasing number of consumers warm up to the idea of owning an electric vehicle, Tesla’s sleek packaging and sense of exclusivity may not actually be enough to keep it profitable. 

And this is where shareholders need to start looking beyond just the car itself.