Tesla Inc. (TSLA, Financial) reported earnings for the second quarter after the bell on July 26. Expectations were running high ahead of the earnings readout thanks in no small part to the electric vehicle company’s July 2 announcement that it had delivered a whopping 201,250 vehicles during the quarter.
At first glance, the earnings report seemed to bear out a number of the bullish predictions. For example, Tesla said its operating business was in the black even before factoring in the sale of regulatory credits to other automakers. As I have discussed previously, credit sales have long been a key profit center for Tesla. They have also informed a long-standing line of bearish criticism to the effect that, absent the infusions from regulatory credit sales, Tesla’s operating business is not sustainable.
Thus, one might be forgiven for thinking that Tesla, having proven the doubters wrong about the sustainability of its operations, as well as delivering another substantial earnings beat, would enjoy a share price boost from the news. That has been the norm with the company’s past earnings beats, after all. However, this did not happen. Indeed, Tesla saw its stock retreat during the July 27 trading session, finishing the day down about 2%.
Why did Tesla’s stock fail to jump on the earnings beat? The answer may lie in its ever-more crowded, and increasingly delayed, product development pipeline.
Semi and Roadster: A cavalcade of delays
Tesla currently has just four vehicle models in production: Model S (luxury sedan), Model X (luxury compact SUV), Model 3 (more affordable sedan) and Model Y (more affordable compact SUV). Such a limited lineup can be restrictive for an automaker seeking to expand its reach, a fact it has acknowledged on many occasions. The company's solution has been to unveil a number of forthcoming models that promise to take the company’s growth to the next level.
The Tesla Semi and next-generation Roadster were unveiled together in November 2017. During the glitzy press event, CEO Elon Musk took the stage to regale his rapt audience with promises of performance and range far beyond what was then believed to be possible with existing EV technology.
Throughout 2018, Tesla repeatedly reaffirmed its Semi timeline, which called for delivery of production vehicles to commence in 2019. As the year wore on with no sign of the Semi, the timeline was revised to 2020. In June 2020, hopes that the Semi’s time had finally come were again reinvigorated by a leaked email from Musk to the Tesla team in which he stated, "It's time to go all out and bring the Tesla Semi to volume production.” Alas, this too proved to be a false dawn for the Semi.
According to Tesla’s latest quarterly update, the Semi has been relegated to “In Development” status, with deliveries now expected to begin in 2022. Things have not gone much better for the Semi’s original co-star. The new Roadster has also faced repeated delays. As of January 2021, Tesla now expects deliveries to begin no sooner than 2022.
Cybertruck: Still stuck in development
The Semi and Roadster are not the only Tesla models to have trouble getting from concept to commercialization. The Cybertruck, unveiled with the usual Tesla flourishes and fanfare in November 2019, has also stalled.
WIth promised performance specs every bit as ambitious as those of the Semi and Roadster had been two years earlier, Tesla’s all-electric pickup truck attracted significant media and analyst attention. Initially slated to enter mass production in late 2021, its progress has ended up looking every bit as glacial as that of the Semi or Roadster.
With Tesla’s plans currently calling for the Cybertruck to be built in its as-yet-unopened Texas manufacturing facility, volume production will likely not be possible until at least 2022. That is, of course, assuming that the Cybertruck design is actually finalized by that point. However, rather than being on the cusp of production, as various bullish analysts and commentators have variously predicted in recent months, we now know that the Cybertruck is still very much a work in progress. This revelation came courtesy of Lars Moravy, Tesla’s vice president of vehicle engineering, who provided an update on the Cybertruck’s status during the company’s July 26 earnings call:
“Cybertruck is at a stage where we finished basic engineering of the architecture of the vehicle. With the Cybertruck, we are redefining how a vehicle is being made. As Elon said, it carries much of the structural pack and large casting design of the Model Y being built in Berlin and Austin. Obviously, those take priority over the Cybertruck, but we are moving into the beta phases of Cybertruck later this year and we will be looking to ramp up production at Giga Texas after Model Y is up and running.”
Clearly, much remains to be done before the Cybertruck moves to commercialization. Tesla may already be laying the groundwork for still more delays. As hedge fund manager Brad Munchen observed on July 26, the “vague verbiage” in Tesla’s second-quarter update regarding Cybertruck production could open the door to further timeline revision.
As I see it, Tesla’s latest earnings beat has fallen flat because the share price already accounts for such occasions. The company did not rocket to the position of world’s most valuable automaker last year because of what it was doing at the time. Rather, it was the result of surging confidence in Tesla’s ability to deliver monumental growth over a multiyear span.
Even after retreating more than 25% from the all-time highs set in January, Tesla’s market capitalization still dwarfs those of much larger automakers. In other words, its valuation assumes more than mere breakeven profitability; it assumes vast future profitability built on market domination and software-level margins. Such performance will not be possible if Tesla fails to rapidly expand its product portfolio.