In the after-hours of yesterday, Monday, July 26, 2021, automaker Tesla Inc. (ticker: TSLA) released its earnings report for the second quarter of the 2021 fiscal year (Q1 FY2021) in a conference earnings call with CEO Elon Musk and other top executives of the company.
Although its stock has been wavy in the stock market recently and with Musk involved in a legal battle with shareholders, Tesla’s profit in the last quarter managed to top $1 billion for the first time in its 18 years of existence. In addition to that, Tesla’s sales nearly doubled in the same period, beating Wall Street expectations by far.
However, unlike Twitter Inc. (ticker: TWTR) that sent shockwaves in tech stocks after releasing its earnings report last week, Tesla did not have the same effect on the stock market as there was no rally for its stock after releasing its report last evening, gaining only 1% in after-hours trading. This is partly attributed to the “limited” supply of batteries for its Electric Vehicles (EVs). The ongoing chip shortage in the EV industry crippled the automaker’s output and forced it to postpone the launch and manufacture of its highly-anticipated commercial truck.
The company reported earnings of $1.14 billion, or $1.02 a share, in Q2 FY2021, which is a considerable margin compared to what $104 million, or 10 cents a share, earned Q2 FY2020. When this figure is adjusted for one-time items, Tesla earned $1.45 a share.
Tesla’s revenue almost doubled from where it stood a year ago at $6.04 billion to its closing in the second quarter of 2021 at $11.96 billion, representing a rise of 98%. The company partly attributed this to “substantial growth” in vehicle sales.
According to FactSet, analysts expected Tesla to report adjusted Earnings Per Share (EPS) of 94 cents on sales of $11.51 billion in Q2 FY2021, but as previously mentioned, this expectation was beaten. Tesla’s Q2 FY2021 results marked the eighth straight Generally Accepted Accounting Principles (GAAP) and adjusted quarterly profit for the company, but it was the first time its profits hit $1 billion.
Tesla’s operating income increased year on year, and the company kept its sales guidance for the year intact and nonspecific. Tesla expects average annual growth in vehicle sales of 50%, and this company feels it could grow even faster in 2021 overall.
Tesla shares have dropped about 6% year-to-date, but the company’s stock has registered a gain of nearly 133% year-over-year.
When analysing the challenges Tesla has faced in the current quarter (and is still facing): the chip shortage remains a severe challenge for the company. Chief Executive Officer, Elon Musk, adds that the supply of this essential component “is fundamentally the governing factor” on the company’s output. It is a challenge the company is still attempting to solve in the midst of trying to meet its customers demands, one whose solution is not entirely within the company’s direct control.
Before discussing it at the earnings call, Musk had expressed concern about the ongoing shortage of these essential computer chips that have hampered the company’s operations. In a tweet, Musk likened the chip shortage to the toilet paper frenzy that happened last year in the U.S. at the onset of the coronavirus pandemic.
“Our biggest challenge is the supply chain, especially microcontroller chips. Never seen anything like it. Fear of running out is causing every company to overorder – like the toilet paper shortage, but at epic scale,” Musk tweeted. At that time, he didn’t think the shortage would last longer, so he concluded his tweet by saying, “That said, it’s obv[iously] not a long-term issue.”
When COVID-19 had just started gaining momentum in the U.S. last year, people had no idea what they truly needed and whether or not their basic needs would be easily accessible; they rushed to stock up on toilet paper, among other things, out of fear of supply chain shortages. This shopping rush left many supermarkets and large retailers with empty shelves of products like toilet paper and wipes for some time.
A similar thing is currently happening with computer chips, and it has been attributed to COVID-19, among other factors. In recent months, numerous car manufacturers worldwide have rushed to make big orders of computer chips, overwhelming makers and suppliers with high demand that has caused a global shortage; Computer chips make up about 40% of a new car’s cost.
Automakers have found it rather challenging to access all the chips they would require to ensure optimal production of cars due to port delays and the global shipping container shortage. The chip shortage has led to a drop in the number of new cars as production has reduced significantly, with some companies forced to hold the manufacturing of new models altogether. As a result, the prices of used cars have risen to record-highs.
According to AlixPartners, a consulting firm best known for its work in the turnaround space, automakers will lose an estimated $110 billion due to the chip shortage this year.
Due to the shortage, some automakers have decided to manufacture only the most profitable car models to meet manufacturing goals. In contrast, others have begun selling cars without navigation and collision detection systems – elements that require the chips.
However, Tesla has avoided this, and it has even added more high-tech automated elements to its cars, but this does not mean that the company has not been affected by the shortage. Musk announced that the company decided to delay the launch of its Semi Truck until 2022.
To weather the storm, Musk said yesterday that they had to rewrite the chip software as an alternative to global shortage, but it is not just a walkover.
“We were able to substitute alternative chips and then write the firmware in a matter of weeks. It is not just a matter of swapping out a chip; you also have to rewrite the software,” Musk said.
The call could not end with a surprise from a man as controversial as Elon Musk, as he told analysts he would be unlikely to be on future Tesla earnings calls unless there would be something important for him to say.