Will Q2 production figures help to revive the Tesla share price?

Over the past few years, the Tesla share price has been one of the top performing US stocks. However, recent months have brought headwinds, with issues such as supply chain disruptions, rising inflation and Covid-19 lockdowns in China. Despite intensifying downward pressures, analysts expect the EV company’s upcoming Q2 trading update to reveal relatively strong margins.    

Electric vehicle maker Tesla [TSLA] has seen its share price slump so far this year amid wider headwinds for tech stocks and lower than expected production figures. As the company prepares to announce its Q2 earnings on 20 July, investors will be hoping for another record-breaking quarter.

According to 20 analysts polled by Yahoo Finance, Tesla is expected to report revenues of $17.3bn for the quarter ending 30 June, up 44.5% year-over-year. A consensus of 16 analysts polled by MarketScreener forecast earnings per share of around $1.58, up from $1.02 in the year-ago quarter but down from $2.86 in the previous three months.

As of 15 July, the Tesla share price has soared 998.5% over the past five years, far outperforming the majority of other US stocks. However, year-to-date, the Tesla share price has underperformed the S&P 500, falling 31.8% in comparison with the S&P 500’s decline of 18.9%.

This underperformance has been driven by several factors. Amid supply chain issues and lockdowns in China, there has been evidence that growth is slowing for the company. Second, after years of dominance in the electric vehicle (EV) space, Tesla has also come up against rising competition. Big names with a strong presence in the EV sector include Volkswagen [VWAGY], Toyota [TM] and BYD [BYD]. Furthermore, Elon Musk’s recent collapsed deal for Twitter [TWTR] has led to some investors worrying that this could create an unnecessary distraction for the Tesla CEO.

Analysts forecast reduced margins in Q2

There have been many issues leading up to Tesla’s Q2 earnings announcement. For example, due to the Shanghai lockdown in March and April, the company was forced to shut its factory in the city for 22 days. As this is one of the largest Tesla factories, it has negatively impacted the group’s deliveries for the quarter. For the quarter ending 30 June, deliveries totalled 254,000, down from 310,000 during the previous three months. As a result of the fall in output, Chinese EV rival BYD overtook Tesla in global electric vehicle sales.

These issues have led to analyst fears around margins for the upcoming quarter. For example, Credit Suisse analyst Dan Levy expects that gross margins will be around 23%, down seven percentage points from the first quarter. This is because Tesla retained most of the costs associated with running the Shanghai factory, without the revenues associated with full production. As a result, Levy predicts earnings per share of ‘only’ $1.31 for the quarter, down from $3.22 in the first quarter.

Nevertheless, the company has reported many improvements at the end of the quarter and June was the company’s highest ever vehicle production month. Therefore, Argus Research analyst Bill Selesky expects that Tesla will be able to “modestly” beat expectations, thanks to reduced costs and relatively strong margins.

Tesla stock rated a ‘buy’ despite rising competition

Rising competition continues to be a factor for Tesla in the EV space. For example, although the EV industry is growing, competition is also heating up. Warren Buffett-backed BYD exceeded Tesla in global electric vehicle sales, selling 641,000 vehicles year-to-date in comparison with Tesla’s 564,000. Additionally, Volkswagen raised its all-electric vehicle deliveries by 27% in the first half of 2022. These are slightly worrying signs for the long-term future of Tesla if it is unable to keep up with its rivals.

There are also some worries arising after Musk’s failed acquisition of Twitter. As Tesla’s CEO has backed out of the deal without Twitter’s consent, this is likely to lead to extensive court action, a factor that will reduce Musk’s time to focus on his EV business. At the same time, if he must pay large damages, he may be forced to sell more of his Twitter stake to do so, which could lead to a further decline in the Tesla share price.

Analysts have always had a mixed reaction to Tesla stock, with some stating that it is drastically overpriced, while others have pointed to its excellent prospects for the future. Overall, analysts are generally confident at the moment. According to analysts polled by MarketWatch, the stock has 25 ‘buy’ ratings, 10 ‘hold’ ratings and eight ‘sell’ ratings. With an average price target of $921, this implies an upside of 27.9% on the 15 July closing price.