Tesla topped expectations on the top and bottom lines in the second quarter. Revenue climbed 47% year over year to $24.9 billion, and generally accepted accounting principles (GAAP) net income increased 20% to $2.7 billion.
But Wall Street fixated on margin compression. Tesla reported an operating margin of 16.8% last year, the highest among volume carmakers, but that metric fell to 9.6% in the second quarter as the company cut vehicle prices to stimulate demand amid challenging economic conditions.
Given the choice, management would make the same decision again, rationalizing that it makes sense to prioritize volume right now because autonomous driving technology will ultimately be the primary source of profitability. To quote Musk, "It's better to ship a large number of cars at a lower margin, and subsequently harvest that margin in the future as we perfect autonomy."
Going forward, the bull case for Tesla centers on two large opportunities: electric vehicles and autonomous driving technology
Tesla gained market share in battery electric vehicles (BEVs) through the first half of 2023, due in part to the Model Y becoming the best-selling vehicle of any kind in the first quarter. The company accounted for 21.8% of BEV sales through June, up from 19% in the same period last year, and nearly seven percentage points ahead of its closest competitor.
Better yet, Tesla still has one of the highest operating margins in the auto industry, and Musk attributes that success to manufacturing prowess and innovation. For example, Tesla produces battery packs (the most expensive component of an electric car) at a lower cost per kilowatt-hour than other automakers, and its leadership is expected to last through the decade, according to Cairn Energy Research Advisors.
Tesla plans to press its advantage with a potentially revolutionary assembly process at Giga factory Mexico, where vehicle production will begin in 2025. The so-called "unboxed" assembly process could cut manufacturing costs in half and reduce factory footprint by 40%, according to Reuters.
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