Market Insights

Tesla ($TSLA) is the second largest position in my portfolio (after $NVDA).

This week Tesla announced their Q2 earnings, so I will start this week’s issue with my thoughts on Tesla’s current situation and future.

Overall, it was a solid beat against not-too-crazy expectations:

• $24.9bn revenues, $300m above consensus

• $0.91 EPS, $0.11 above consensus

• Automotive and Services businesses drove this beat

• Energy revenue came in below expectations

The stock price has not taken this earnings report well (down over -10% in 2 days). I usually don’t make short-term price predictions, especially on the companies I have long-term convictions in, like Tesla.

But here is my base case (please take it with a grain of salt): I believe this post-earnings dip will be a short-lived one, and $TSLA will quickly move higher after 1-2 months.

Q1 was important for Tesla because it informed us about the Profit Margin elasticity of the “Price Cuts”. More price cuts, more pain to the bottom line. But surprisingly, the market has digested this matter already during the violent trading over the past 8-9 months (down -66% then up +101%).

This tells us Price Cuts and Profit Margin are no longer the stock price shocker anymore, which is huge.

We know that this is not an easy time for Tesla. While top-line growth is still decent and unrivalled, but EPS growth story has stalled, which is shaking out the paperhands.

Investors are pricing in to accept that fact and eyeing on future catalysts that have not yet hit the income statement. Just to name a few:

• The launch of Cybertruck

• The reveal and launch of Gen 3 Platform

• The scaling of Dojo & Semi

• The normalization of vehicle financing rates

Many exciting events are in the pipeline and a good amount of the current weakness in fundamentals is deemed temporary. This has helped the stock to come back from its depressing lows in January.

Here are my breakdown on each segment of Tesla’s current conditions:

#1 — Automotive

Tesla’s aggressive pricing strategy caused ASP dropped to $46,000, the lowest level it has ever been.

Am I worried? No.

The future of AV is the “Winner Eats All” industry. Tesla’s strategy is the textbook of eating the market share at all cost and dominating the market in the future with massive moat. Vehicle is the “hook” for the entire ecosystem Tesla is building.

In fact, I am glad Tesla is doing it, because it matches the exact thesis I invested in Tesla at first place.

Commodity deflation and positive economies of scale should soon reveal a turnaround on profitability at the vehicle level. But we need to be patient on that.

#2 — Energy

Although Energy segment is the only one that didn’t beat Q2 consensus, I am incredibly bullish on this Tesla’s Energy Generation and as well as Energy Storage businesses.

Before Lathrop started, Tesla Energy operated at a $4bn revenue run rate. Now, we should see it at a $20bn revenue run rate in a year or two, which suggests $5bn per quarter.

At 20% target gross margin, this would then be a business with $4bn profits per year that adding into Tesla’s income statement. It’s encouraging that Tesla is already at the target profitability in Energy segment.

Eventually, this business will be huge as it is driven by the giant renewable energy CAPEX cycle currently unfolding around the world.

#3 — Services

Tesla’s Services business is quietly becoming a real profit contributor. This includes supercharging, insurance, financing, used car sales and retail merchandise.

Over the coming decade, Tesla’s business model will be transformed from a unit sales model to a “fleet based” model.

Services will play a much bigger role for revenues and earnings. It’s inevitable. It has happened for other Big Tech companies over and over again, and Automotive OEMs operate fleet based business models as well.

This is another exciting part which has further rooms for market to price in.

Alright, enough of my personal rants on Tesla, here are some of the most notable comments from Elon Musk himself during the earnings call:

#1 — FSD Licensing

This one sparked excitement! Elon clearly indicated that they are in early discussions with another OEM to potentially supply them with Tesla’s FSD hardware and software.

This is the first time Tesla officially confirmed they are having such conversations.

Remember how well the stock reacted to the announcements that Tesla opens their superchargers to other OEMs? A similar announcement on FSD would be that 20X more impactful.

Licensing a high-margin FSD to a third party would spark an anticipation on a new (and huge) business segment that brings billions of dollars in revenue at low cost.

And it would be a huge vote of confidence for Tesla’s FSD program which still many investors are sceptical about.

#2 — AI Hardware Dojo

Dojo is the AI hardware machine optimized for Tesla’s business needs specifically. Tesla is essentially trading flexibility for effectiveness. Other players cannot do that at such scale because they are not tackling comparable problems.

Tesla is building a massive moat with Dojo.

It will become an extremely important value drive in a few years. So far, only tech nerds can appreciate that. But eventually the general public will wake up to it in a ChatGPT-style moment.

Alright, wrapping it up — I believe for the remainder of the year, there will be a cyclical and seasonal impulse in Automotive, and the stock price will likely react positively to surprise on deliveries and economies of scale.

I am comfortable to be in the Buy-the-Dip over Sell-the-Rip mode on $TSLA.

Chart Of The Week

Everyone is freaked out by this week’s sell off, especially if you are heavy on Tech stocks.

But here is some good news MSM didn’t talk about — The Net LONG Exposure in S&P 500 Options and Futures is making a new high at faster rate.

In my opinion, this is hands down the most important underlying signal of a new sustainable bull market.

It is not excessive yet, however we should take notice this bull market has likely entered the next stage as early short-squeeze stage is ending and traders’s risk appetite is rising in the new stage.

We can’t have the crazy no brainer set-up from the 1H of this year forever.

For further increases, we will need actual fundamentally motivated buying. So a regular 3-5% pull back is actually healthy as it gives fundamental buyers to come in (Reminder - we still have record high cash on the side line).

Here are the detail data of showing the “animal spirit” is brewing:

Aug - Oct is considered the “weakest season” of any given year. But with the current set up, I would see them as great opportunities to buy the dips, rather than something to worry about.

Key Data To Watch

▣ July 3, June ISM Manufacturing — BULLISH

▣ July 6, June ISM Services — BULLISH

▣ July 6, May JOLTS — BULLISH

▣ July 6, June ADP Employment — BEARISH

▣ July 7, June Jobs Report — NEUTRAL

▣ July 10, June Manheim Used Vehicle Value Index — BULLISH

▣ July 12, June CPI — BULLISH

▣ July 13, June Fed Wage Tracker — BULLISH

▢ July 25, May S&P CoreLogic CS Home Price

▢ July 25, July Conference Board Consumer Confidence

▢ July 26, July FOMC Meeting Rate Decision

▢ July 28, June PCE

▢ July 28, July Final Michigan 1-Year Inflation Expectations

Sell the News

“Apple is facing challenges assembling its two upcoming new iPhone models, the iPhone 15 Pro and Pro Max, which could lead to a shortage of units at launch in September... Apple’s suppliers are using a new manufacturing process for the two models, the most expensive of the upcoming series of iPhones, that will allow it to dramatically narrow the width of the display’s black border, known as the bezel. This will allow the iPhone 15 Pros to have a slightly larger screen when compared with previous models, without making the devices larger…” read more

“Microsoft shares rallied to an all-time high after the company announced pricing for its new Microsoft 365 artificial intelligence subscription service. Microsoft’s Copilot subscription service adds AI to the company’s popular Office products like Word, Excel and Teams. It will cost an additional $30 per month and could increase monthly prices for enterprise customers by as much as 83%, bringing in additional revenue through recurring subscriptions…” read more

“Warren Buffett’s Berkshire Hathaway dumped a significant portion of its stake in Activision Blizzard as Microsoft’s deal to buy the video game company edged closer to the finishing line. The Omaha, Nebraska-based conglomerate disclosed a 1.9% stake in Activision with 14,658,121 shares, a new 13G filing released Monday evening showed. That compared with a 6.3% stake at the end of March and a 6.7% stake at the end of 2022. Shares of Activision soared more than 9% last week on news that the Federal Trade Commission lost its bid to block Microsoft’s $68.7 billion acquisition of the video game publisher. Microsoft’s appeal against U.K. regulators’ block on Monday was granted a two-month pause…” read more

“Disney CEO Bob Iger said there will be a pullback in content spending and creation for the Star Wars and Marvel franchises. Earlier this year Disney said it would slash $5.5 billion in costs, including $3 billion in non-sports content costs. Iger said the explosion in Marvel TV shows in recent years “diluted focus and attention” for the brand…” read more

“Twitter's cash flow remains negative because of a nearly 50% drop in advertising revenue and a heavy debt load, Elon Musk said on Saturday, falling short of his expectation in March that Twitter could reach cash flow positive by June …” read more

“Taiwan Semiconductor Manufacturing said revenue could fall as much as 16% in the three months to the end of June, as the weak global economy and high energy prices weigh on demand from customers. The world’s biggest contract chip maker said Thursday that it expected second-quarter revenue of between $15.2 billion and $16 billion, from $18.16 billion a year earlier. On an earnings call with analysts, Chief Executive C.C. Wei said the company will likely post a low- to mid-single digit percentage decline in full-year sales—a more gloomy outlook than the one he gave in January…” read more

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