Tesla | Fundamental Analysis | LONG

Tesla faced a number of adverse factors in the second quarter ended June 30, including a difficult macroeconomic environment and COVID-related restrictions that led to a three-week closure of its Gigafactory Shanghai plant in China. But the problems didn't end there. Shortly after the plant reopened, supply chain problems brought production to a virtual standstill in May. Taken together, these obstacles caused a significant slowdown in production and shipments compared to the previous year, and both declined sequentially.

At the same time, uncertainty surrounding the COVID situation in China prompted Tesla management to sell about 75% of its bitcoins. The move strengthened the company's balance sheet with an additional $936 billion in cash, but bitcoin was still an obstacle to profitability as its value plummeted during the ongoing collapse of the cryptocurrency market.

Despite this, Tesla beat Wall Street estimates on both the top and bottom lines. Revenue rose 42% to $16.9 billion, and non-GAAP earnings soared 57% to $2.27 per diluted share. After such good numbers, is the company's stock worth buying?

CEO Elon Musk has often said that manufacturing efficiency will be Tesla's strongest competitive advantage, and the company is delivering on that promise. In Q3 2021, Tesla delivered industry-leading operating margins of 14.6%, and in Q2 2022, the company hit that mark again, despite inflationary pressures and the cost of expanding new plants in Germany and Texas.

What's driving that efficiency? In a letter to shareholders, company executives noted that innovations such as large castings and parts consolidation have led to a 70% reduction in the number of robots per unit capacity at the new plants. 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. Moreover, Tesla plans to more aggressively incorporate its patented 4680 battery pack into cars next year, further increasing its competitive advantage.

In addition, the Gigafactory Shanghai has localized production in China, reducing Tesla's logistics costs by reducing the number of cars transported across the ocean by ship. Tesla should reap similar benefits in Europe, as Gigafactory Berlin continues to expand 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 on track to deliver 50% annual growth over the long term, and several upcoming catalysts should make Tesla even more efficient. But with a P/S ratio of 14.3 to sales, the stock still looks very expensive compared to other automakers.

Musk believes that over time people will think of Tesla as an artificial intelligence and robotics company, not just an automaker or energy company. In support of this claim, Musk says that Tesla has reached a high level in semiconductor and supercomputer development, and with more than 2 million autopilot vehicles on the road, Tesla has more data (i.e. more autonomous driving miles) than any other competitor, which gives the company an edge in the race to create a fully autonomous car.

This is important because company executives claim that full autonomous driving (FSD) technology will eventually become the company's largest source of revenue. As such, Tesla plans to make its FSD Beta software publicly available in North America by the end of the year. It also plans to launch robotic cab service in 2024 and an autonomous home delivery network in the future, entering a market that Ark Invest believes could generate $2 trillion in annual profits by 2030.

Perhaps more interestingly, Musk thinks Optimus, an autonomous humanoid robot, could eventually eclipse the automobile business in value. Tesla is going to hold an Artificial Intelligence Day later this year, and company executives will have something to say on the matter.

Tesla is currently worth $824 billion, which means the company is worth more than the next 10 automakers combined. Investors clearly expect great things, and those expectations are built into the stock price, at least to some extent. This makes the stock particularly risky in the short term.

However, Tesla has repeatedly demonstrated its ability to innovate, and the company is well positioned to revolutionize the transportation industry in the coming years. For this reason, you should buy this growing company's stock, although you should not invest more than 3% of your portfolio in it.

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