Highlights

• Tesla ended Q2 2020 with $5.2 billion in automotive revenues, a decline of 3.7% from last year. The performance is impressive considering the closure of its main factory in Fremont for nearly half of the quarter. The company also earned a profit of $104 million during the period.
• Automotive gross margin increased from 18.9% in Q2 2019 to 25.4% in Q2 2020, driven by 285.5% increase in regulatory credits to $428 million, operational efficiencies and cost reduction.
• The company announced a new Gigafactory at Austin in Texas to manufacture Cybertruck, Model Y and Model 3 for the US east coast. The plant will also manufacture Tesla Semi. The company also has under-construction plants in Shanghai (for Model Y) and Berlin. Tesla expects all the three plants to be operational in the next 12-18 months.

Tesla managed to earn profits by offsetting some of the costs related to plant shutdowns by furloughing employees and making use of increasing regulatory credits. The company expects regulatory credits to double in 2020 from that in 2019. Increasing regulatory credits will help the company to remain profitable in coming quarters.

Technological Updates

• During the quarter, the company rolled out a beta version of OTA update to slow the car down to a complete halt in response to traffic lights and stop signals. The update was rolled out only to owners having the recent Hardware 3 package ‘full self-driving’ option. The company realised $48 million in deferred revenues through the above update. In February, the company released an OTA update to activate rear-seat heating for $300. During the quarter, Tesla also enabled interior camera recording and side camera blind spot detection with OTA updates. Tesla aims to earn additional revenue by rolling out OTA updates to unlock features.
• Tesla plans to launch its insurance solution in a few more states other than California in 2020. The company’s priority is to develop a reliable telematics-based insurance service rather than expanding the services in California to other states.
• In July 2020, Tesla announced an updated Model S with an EPA tested range of 402 miles. The company continues to increase the range of its batteries through incremental changes in design and technology.

Forecast

• Decent performance despite the main Ferment plant being closed for nearly half of the quarter indicates growing Tesla sales overseas, especially in China where conditions are coming back to normal after the COVID-19 pandemic. Reduced ASPs of some models helped the company to increase sales, compensating to an extent for the tough market conditions. Increased reliance on online sales could have helped Tesla to maintain its deliveries during the lockdown period.
• The company reiterated its earlier commitment to produce 500,000 vehicles in 2020, indicating that demand is not a major issue (as with other automakers) for Tesla. In fact, according to the management, demand continues to exceed supply.
• While the situation still remains fluid with the possibility of a second wave of COVID-19 cases, considering Tesla’s strong performance in Q2 2020, we revise our earlier view of declining Tesla sales in 2020.