Tesla Q2 FY2022 Earnings Report Preview: What to Look For

Tesla Inc. (TSLA), which has enjoyed soaring sales and profits in recent, years, is running into major challenges. The company recently announced its first sequential decline in auto production in nine quarters amid supply chain disruptions, and the top executive who led the company's problem-plagued Autopilot program is leaving Tesla. On top of that, Tesla Chief Executive Officer (CEO) Elon Musk is involved in a heated court battle with social media company Twitter Inc. (TWTR) based on his intentions to walk away from a $44 billion agreement to purchase the firm. All of these developments threaten to disrupt Tesla's business further amid as the global economy slows.

Investors will be looking to see how Tesla is navigating these challenges when the company reports earnings on July 20, 2022 for Q2 FY 2022. Analysts expect both adjusted earnings per share (EPS) and revenue to rise at a rapid pace, but at a significantly slower pace than the prior-year quarter.

Investors have already seen one key metric announced on July 2, quarterly vehicle production numbers, which give an early indicator of earnings and revenue. Tesla already reported that information earlier this month. Tesla produced 258,580 vehicles in Q2, up more than 25% year-over-year (YOY). Despite this significant growth, it represents the slowest growth rate of quarterly vehicle production growth since Q2 FY 2020 at the start of the pandemic.

It's also likely that Tesla investors will watch closely for updates on Musk's battle with Twitter. After making a $44-billion bid to buy the company earlier this year, Musk and Twitter board members engaged in a highly-publicized back-and-forth that resulted in Musk's recent announcement that he intended to back out of the deal. Twitter has responded by suing Musk in an effort to force him to complete the purchase, which now represents a significant premium following a sharp decline in the Twitter share price in recent months. The legal battle is likely to be prolonged. While the deal is officially unrelated to Tesla, Musk did secure a loan against his Tesla shares to secure funding for part of the deal.

Tesla shares have outperformed the broader market in the last year, but the stock's performance has been erratic. After a major rally to a high in November 2021, Tesla stock plunged and since then has swung between major advances and declines. The stock on two occasions came close to replicating the November high: in January and April 2022. But the stock fell sharply immediately after in both cases. After reaching a 2022 low in May, the stock has traded mostly sideways. As of July 16, Tesla shares have provided a 1-year trailing total return of 10.7%, ahead of -11.4% for the S&P 500.

Tesla Earnings History

Tesla's adjusted EPS has performed well throughout the COVID-19 pandemic. Between Q1 FY 2020 and Q1 FY 2022, the company's EPS at least doubled YOY in every quarter. It surged by more than 300% YOY in Q1 FY 2021. In Q2 FY 2021, it jumped by 232.2%. Now, analysts expect a much more modest increase in adjusted EPS. Analysts estimate a 26.6% increase in Q2 FY 2022, marking the slowest growth since Q4 FY 2019.

Tesla's revenue growth has also been strong. In the past nine quarters, it has reported just one period of revenue decline, in Q2 FY 2020. Otherwise, revenue growth has ranged from 31.8% to 98.1%, in Q1 FY 2020 and Q2 FY 2021, respectively. Analysts expect revenue to grow 41.1% in Q2 FY 2022, less than half the pace of the same quarter a year earlier.

^{Sources: Visible Alpha; Tesla Q2 FY 2022, Q2 FY 2021, and Q2 FY 2020.}

The Key Metric

As mentioned above, investors are also focused on Tesla's vehicle production. The company's primary business is making electric cars and it needs to continue expanding production in order to grow revenue and profits. However, the company has faced enormous challenges over the past year related to global supply chain disruptions. Musk has said limitations of raw materials and difficulty in scaling up production have been the primary barriers to growth. Operations at the company's major production facility in Shanghai have also impeded production. Tesla shut down the factory earlier in the year to accommodate local COVID-19 regulations. It later adopted a "closed loop" policy forcing factory workers to sleep in temporary accommodations at the factory in order to maintain production while remaining locked down.

Tesla's vehicle production has slowed due to the above factors. The company reported that it produced 258,580 vehicles in Q2 FY 2022, up over 25% YOY. This is the slowest pace of production growth since the start of the pandemic. Production levels also fell short of analyst predictions, as consensus estimates suggested Tesla would produce 263,400 vehicles for the quarter. But there are signs that production may be increasing. For all of 2022, analysts estimate that Tesla' auto production will increase 52.0%, a robust rate but far below the 82.5% growth of 2021.