Tesla (TSLA 0.01%) battled several headwinds in the second quarter ended June 30, including a difficult macroeconomic environment and COVID-related lockdowns leading to a three-week closure at Gigafactory Shanghai in China. But the trouble didn't stop there. Shortly after the factory reopened, supply chain problems brought production to a near-standstill in May. Collectively, those obstacles caused a substantial deceleration in production and delivery totals compared to the prior year, and both metrics declined sequentially.
On a related note, uncertainty surrounding the COVID situation in China led Tesla's management to sell about 75% of its Bitcoin. That move bolstered its balance sheet with $936 billion in additional cash, but Bitcoin was still a headwind to profitability, as its value dropped sharply during the ongoing crypto market crash.
Even so, Tesla beat Wall Street's estimates on both the top and bottom lines. Revenue climbed 42% to $16.9 billion and non-GAAP earnings soared 57% to $2.27 per diluted share. After that solid performance, is the stock a buy?
Manufacturing efficiency
CEO Elon Musk has often said manufacturing efficiency will be Tesla's strongest competitive advantage and the company is making good on that promise. Tesla delivered an industry-leading operating margin of 14.6% in Q3 2021, and the company hit that mark again in Q2 2022, despite inflationary pressure and the cost of scaling new factories in Germany and Texas.
What's driving that efficiency? In the shareholder letter, management noted that innovations like large casting and parts consolidated led to a 70% drop in robot count per unit of capacity in the new factories. Tesla also pays less to produce battery packs -- the most expensive part of an electric car -- than any other automaker, giving the company a cost advantage. Better yet, Tesla plans to more aggressively integrate its proprietary 4680 battery cells into vehicles next year, further extend its competitive edge.
Additionally, Gigafactory Shanghai has localized production in China, lowering logistics costs for Tesla by reducing the number of vehicles shipped across the ocean on boats. Tesla should see a similar benefit in Europe as Gigafactory Berlin continues to scale throughout the year.
Here's the bottom line: Under the circumstances, Tesla posted impressive financial results in the second quarter. More importantly, the company is still guiding for 50% annual growth in deliveries over the long term, and several upcoming catalysts should make Tesla even more efficient. But with a P/S ratio of 14.3 times sales, the stock still looks very expensive compared to other automakers.
Artificial intelligence and robotics
Musk believes people will eventually think of Tesla as an artificial intelligence and robots company, not just an automaker or an energy company. To support that claim, Tesla has become highly proficient in semiconductor and supercomputer design, and with more than 2 million autopilot-enabled vehicles on the road, Tesla has more data (i.e. more autonomous driving miles) than any rival, which gives the company an edge in the race to build a fully autonomous car.
That's important because management says full self-driving (FSD) technology will ultimately be the largest source of profitably for the company. On that note, Tesla plans to make its FSD Beta software generally available across North America by the end of the year. Better yet, it has a robotaxi slated for production in 2024, and it plans to launch an autonomous ride-hailing network in the future, entering a market that Ark Invest believes could generate $2 trillion in profits per year by 2030.
Perhaps more exciting, Musk believes Optimus -- an autonomous human robot -- could eventually eclipse the car business in terms of value. Tesla is set to host an AI Day later this year, and I bet management will have a lot to say on the subject.
Is the stock a buy?
Tesla is currently an $824 billion business, which means the company is worth more than the next 10 automakers combined. Investors clearly expect great things and those expectations are baked into the stock price, at least to some degree. That makes the stock especially risky in the short term.
However, Tesla has demonstrated its capacity for innovation on countless occasions, and the company is well positioned to revolutionize the transportation industry in the coming years. For that reason, I think it's worth buying this growth stock, though I wouldn't make it more than 3% of my portfolio.
