Tesl TSLA +1.5%a has finally racked up four consecutive profitable quarters, a decade after the iconic electric-car maker’s IPO, ensuring that controversial CEO Elon Musk will receive a massive stock payout worth more than $2 billion and likely paving the way for it to join the S&P 500. Musk also said Tesla’s next auto-assembly plant will be built in Austin, Texas.
The company reported second-quarter net income of $104 million and earnings per share of 50 cents, topping consensus expectations of an adjusted loss per share of 11 cents. Revenue was $6.04 billion, down from a year ago but beating a consensus estimate of $5.4 billion. As usual, sales of regulatory credits to other automakers were a lucrative revenue source, bringing in $428 million of free money in the quarter (and a record $732 million in the first half).
The results come after a turbulent first half in which Musk’s aggressive growth plans were thrown off track by the coronavirus pandemic that disrupted vehicle production at the company’s main plant in California. Although frustration with health officials in Tesla’s home state triggered a series of erratic tweets and threats to relocate to other parts of the U.S., production operations seemed to return to normal in the quarter’s second half.
“We consider the quarter a low-quality beat,” CFRA equity analyst Garret Nelson said in a research note, as “results were boosted by an unusually high level of auto regulatory credit revenue.” The surprisingly large $428 million credit figure compares to an average of $183 million over the last four quarters, according to Nelson, who rates the shares a Sell. “While TSLA once again managed to pull a rabbit out of the hat for earnings, we believe its share price has become decoupled from underlying fundamentals and see growing risks surrounding the story as shares increasingly appear priced to perfection.”
Nevertheless, the results make it likely that Tesla’s board will certify requirements for the second tranche of Musk’s massive multiyear pay package have been met, including market capitalization averaging $150 billion over trailing 60- and 30-day periods and Tesla achieving either EBITDA of $3 billion or revenue of $35 billion over four consecutive quarters. The market cap requirement was met this week and Tesla’s EBITDA over the last four quarters is $4.04 billion. Musk, currently ranked No. 7 on Forbes’ Billionaires list with a net worth of $72.4 billion, is set to receive additional Tesla stock worth $2.1 billion.
Shares of the Palo Alto, California-based company, which have inexplicably surged more than 300% this year, rose 1.5% to $1,592.33 prior to the earnings release. They were up a further 5.4% in after-hours Nasdaq NDAQ +2.4% trading.
“Despite the closure of our main factory in Fremont for nearly half the quarter, we posted our fourth sequential GAAP profit in Q2 2020, while generating positive free cash flow of $418M,” Tesla said in a letter to shareholders on Wednesday. “We believe the progress we made in the first half of this year has positioned us for a successful second half of 2020. Production output of our existing facilities continues to improve to meet demand, and we are adding more capacity.”
By notching four consecutive profitable quarters, Tesla seems to have fulfilled the final requirement to gain admission to the S&P 500. If it is added to the index, it could also mean a big payday for investors as the shares would be included in the biggest mutual funds.
The company said it has the production capacity to make more than 500,000 vehicles this year at its Fremont and Shanghai plants. It’s building a new plant near Berlin for the European market and Musk said Wednesday Tesla’s next U.S. auto plant will be built in Texas.
“The location is five minutes from Austin National Airport and 15 minutes from downtown Austin,” Musk said in a conference call. “It’s about 2000 acres, and we’re going to make it a factory that it’s going to be stunning. It’s right on the Colorado River.”
The industrial facility will be an “ecological paradise,” he said. “We’ll be doing the Cybertruck there, the Tesla Semi and Model Y and 3 for the eastern half of North America.”
Musk also discussed Tesla’s progress with autonomous driving software, without providing specific timing for its public availability; the company’s advances in designing highly efficient auto plants; plans to expand its inhouse insurance product from California to other U.S. states; and procuring more nickel and other materials needed for its batteries. Notably, he also said Tesla will sell Model 3s in China using lithium iron phosphate battery packs. While that cell is highly durable and widely used in China, typically it’s also heavier and less energy dense than the nickel-cathode cells Tesla has always used in its vehicles.
“Our total vehicle efficiency has gotten good enough with Model 3, for example, that we actually are comfortable having an iron phosphate battery pack in Model 3 in China,” Musk said. “That’ll be in volume production later this year.”
Earlier this month Tesla said it delivered 90,650 units of its Model 3, Y, S and X vehicles to customers in the second quarter, down from 95,200 a year ago, but far more than the consensus expectation of fewer than 70,000 vehicles. For reasons known only to Musk, he used the company’s good news as an opportunity to mock his nemesis: the U.S. Securities and Exchange Commission.
“Amusement parks might have been shut down due to the pandemic, but Tesla rode a rollercoaster of highs and lows in the second quarter,” said Jessica Caldwell, executive director of insights for auto researcher Edmunds. “It’s a bit ironic that for once, Tesla wasn’t its own worst enemy, and instead found itself facing the same challenges as other automakers and businesses due to the global pandemic that continued to cripple the economy and consumer pocketbooks.”
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