EV (electric vehicle) titan Tesla (NASDAQ:TSLA) delivered stronger-than-expected second-quarter financials. Moreover, its adjusted EPS jumped 20% year-over-year. However, lower ASPs (average selling prices) took a toll on its margins, leading to a 4.2% drop in TSLA stock after hours. Nonetheless, Wall Street analysts remain unfazed by Q2 results and continue to have the same opinion on TSLA stock following the earnings announcement.
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Margins to Remain Pressured in Short Term
Tesla lowered its ASPs to accelerate volumes. The strategy weighed on the company’s industry-leading margins. Tesla’s gross and operating margins have experienced a consistent decline in the past several quarters. In Q2, GAAP gross margins fell 682 basis points year-over-year. Meanwhile, it declined by 110 basis points sequentially.
Further, TSLA’s operating margin fell 493 basis points year-over-year as the company’s emphasis on price cuts to drive volume growth continued to eat into the automotive margin.
During the Q2 conference call, Tesla CEO Elon Musk hinted that the company could take further price cuts in the short term, depending on market conditions. This could further dent TSLA’s margins.
However, Musk emphasized that TSLA is a “big long-term investment” and “short-term variances in gross margin and profitability really are minor relative to the long-term picture.” He added that autonomy will help recoup margins and “make all of these numbers look silly.”
Analysts Remain Unfazed
Mizuho Securities analyst Vijay Rakesh acknowledged that lower ASPs squeezed TSLA’s margins. However, the analyst maintained a Buy recommendation on Tesla stock and increased the price target to $330 from $300 following the Q2 earnings release.
Rakesh said that TSLA is a global leader in the EV space and sports “much stronger EV margins” compared to its peers. Moreover, with a long-term production target intact, TSLA will continue to lead the industry.
Along with Rakesh, Garrett Nelson of CFRA also reiterated the Buy recommendation on TSLA stock. The analysts’ price target of $325 implies a further upside potential of 11.58% from current levels.
Goldman Sachs analyst Mark Delaney is bullish about TSLA’s long-term prospects. However, the analyst maintained a Hold on TSLA stock as he believes that positives are already reflected in its share price, which has rallied quite a lot on a year-to-date basis. However, the analyst sees near-term margin headwinds if Tesla cuts prices further.
Is it Good to Invest in Tesla?
Tesla is a global leader in EVs and has a portfolio of products and technologies that help it grow and defend its market share. While TSLA is a solid long-term investment, the recent run in its share price could limit the upside potential in the short term.
Wall Street analysts maintain their cautiously optimistic outlook on TSLA stock following Q2 earnings. TSLA stock has received 12 Buy, 11 Hold, and four Sell recommendations for a Moderate Buy consensus rating. Analysts’ average price target of $252.08 implies 13.45% downside potential from current levels.
