5 key takeaways from Tesla’s historic Q2 results that have nothing to do with Bitcoin

July 27, 2021, 1:00 PM UTC

Tesla published record second-quarter results after the close of markets Monday, and for once Bitcoin barely even factored into the conversation. Taking a break from preaching the gospel of cryptocurrencies, Musk celebrated public sentiment towards battery electric vehicles reaching an inflection point. “At this point I think almost everyone agrees that electric vehicles are the only way forward,” he told investors. Indeed, Daimler’s premium brand Mercedes-Benz detailed plans only last week to phase out internal combustion engines now that regulators have proposed bans, and even Ram has promised a Cybertruck rival.

As if to signal his advocacy work was now done, Musk said he would only attend at quarterly calls in the future if he had something important to get off his chest. This leaves shareholders more dependent than ever on decoding his often cryptic Twitter posts for signals on the company’s direction. Below are five key takeaways from Monday’s last definite earnings call with the enigmatic visionary.   

Next-generation 4680 cells need backup plan

Tesla’s new form factor for its cylindrical battery cells—so named due to their 46 mm width by 80 mm length—are supposed to deliver a major performance improvement over their current 2170s… provided they can be manufactured at scale. At its Battery Day in September, Tesla promised the new cell would offer 16% better range at a 14% lower dollar cost per kilowatt hour irrespective of what chemistry was found inside.

On Monday, Musk said engineers were still working out the kinks in their pilot production line in California after discovering dents in the heavy calenders that roll the dry cathode active materials flat like “pizza dough”. With much of the equipment destined for mass production now in need of modification, it’s virtually certain Tesla will not be able to produce the 100 gigawatt hours worth of cells in-house it had targeted for next year.

Instead Musk now aims to install that capacity in time for the start of 2023, but timing could slip. As a result, management developed a backup plan using 2170s for Giga Berlin and Giga Texas, which are both supposed to build Model Y crossovers that utilize the new form factor. Even if Tesla doesn’t reach its own cell production targets, Musk said this won’t be a constraint next year as suppliers like Panasonic are on track to deliver roughly twice as many as this year.

Cybertruck launch likely delayed

Reports that the brand’s freshman attempt at a pickup might be the first series production vehicle to run off the assembly line at its Giga Texas currently under construction seemed to indicate a rethink at Tesla. Fan websites tracking the number of deposits made for the polarizing truck have estimated around 1 million potential customers, easily more than two year’s worth of production capacity at the Austin site. Given the Model Y crossover is already built in Fremont and Shanghai with Berlin scheduled to follow, the idea of Texas starting with the Cybertruck has its merits: the sooner Musk starts working down this enormous backlog, the less of a chance frustrated customers near the back of the line might cancel their order and opt for a rival like the Ford F-150 Lightning or Rivian R1T. 

The speculation proved however to be untrue, dashing hopes from many in the Tesla community that love the radically different look of the pickup. Chief engineer Lars Moravy said the Cybertruck was “moving into beta phase” later this year with a ramp up of production only after the Model Y was up and running in Austin. This is in part due to a lack of sufficient 4680 cells needed to achieve the product specifications Tesla promised. No firm commitment was made on the first deliveries of the “CT” as it’s often called, but it appears clear a launch before the end of 2021—as still indicated on its own website—is now off the cards. 

FSD’s value currently “debatable”

Tesla earlier this month launched its subscription service for Full Self Driving, its optimistically named driver assistance system that requires constant supervision. New Tesla vehicles, which already come equipped with the carmaker’s third generation FSD computer hardware, can be upgraded via a software flash to include features like Navigate on Autopilot for $199 a month. Management told investors it was too early to properly gauge demand for the new service, but indicated uptake has thus far been muted. Musk admitted this is because the value it delivers for such a hefty price proved “debatable.”

CFO Zach Kirkhorn said Tesla analyzed the behavior of those customers still waiting on their new Tesla to come equipped with the $10,000 option to see if they would cancel FSD, presumably to switch to a subscription. They found an immaterial number doing so, suggesting interested owners preferred to purchase it in anticipation that the price would only appreciate over time as FSD improved. Effectively, Musk confirmed FSD was too expensive for the features on hand and demand largely reflected customers placing a bet on its future capabilities. With a key feature like supervised driving assistance on city streets potentially rolling out to all Tesla FSD owners only next year, Musk said subscription will not be a significant factor until then. 

No escaping the chips crunch

During the call, management said it would push for a continued sequential increases in volume, suggesting third-quarter volumes would exceed the record 200,000-odd deliveries it made in the three months to the end of June. Nonetheless it made clear that supply chain headaches were increasing in pain in step with the higher projected volumes, explaining the supply of semiconductors remained the single biggest limiting factor constraining growth. The crunch already forced Tesla to scramble by acquiring different semiconductors than normal and rewriting its firmware to integrate them into their vehicles before validating them for production. “The chip supply is fundamentally the governing factor on our output. It’s difficult for us to say how long this lasts. This is out of our control, essentially,” Musk said. The semiconductor shortage is so acute, it’s even holding up production of the company’s Powerwall stationary energy storage systems.

Finally profitable without crutch

None of these obstacles should detract from one key milestone reached last quarter. For the first quarter ever, Tesla earned more than $1 billion in after-tax earnings attributable to shareholders. With a greater focus on the efficient use of funds, Tesla demonstrated it can finally scale its business after years of heavy investments. Operating margins swung from a negative integer to a double-digit percentage figure in the course of two years, despite average selling prices declining by over 10% during the period, according to Kirkhorn. 

More importantly the company proved it can be profitable without the crutch of regulatory credits sold to other carmakers. In the past, the lucrative sale of CO2 emission rights magically turned the perpetual tide of red ink into black. Yet in the second quarter their contribution dropped to just $354 million, the lowest since the first three months of 2020 and down considerably from the $518 million reported a quarter ago. The timing couldn’t be any more propitious as other carmakers like Stellantis are steadily weaning themselves off of their costly dependence on Tesla credits

Nevertheless, Musk’s typical bravado melted away briefly as he pledged to ensure his organization would not become complacent: “If you look at history, so often the seeds of defeat are sown on the day of victory—we will endeavor not to make that the case at Tesla.”

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