Tesla is a story stock with a haloed CEO in Elon Musk, and as such, it seems less subject to pesky business metrics such as earnings or profitability. 

So, despite missing its Q2 earnings and other targets, as related in a letter released late last week (misses that might have toppled a lesser stock), Tesla's stock price barely wavered, and in fact seems to have risen upon the bad news. Some analysts have suggested that Tesla stock now trades solely on the success (or failure) of the Model 3. Tesla claims to "have completed the design phase of Model 3 and released Model 3 for tooling, production planning and validation."

Here are the quarterly details.

  • Tesla had a larger-than-expected second-quarter loss of $1.06 per share -- while the Street looked for a net loss of 59 cents a share
  • Non-GAAP sales were $1.56 billion, up from last year’s Q2 revenue of $1.2 billion, but below analyst expectations of $1.63 billion
  • Automotive gross margin expanded, but missed consensus estimates 
  • Tesla delivered 14,402 cars (9,764 units of Model S and 4,638 units of Model X) in Q2 and looks to “support 50,000 deliveries” during the second half of 2016
  • According to the letter, "We ended up with $3.25 billion on the balance sheet at the end of the quarter. [...] On December 31, 2015, we had $1.2 billion. We raised $1.7 billion in our secondary offering and we collected on our Model 3 reservations."

Stuff Tesla CEO Elon Musk says

One, make that two, priorities: "So, the focus really is on Model 3, followed by full autonomy -- well, it's our two priorities." 

Ballistic stationarystorage: Musk said there are heavy engineering and production constraints, adding, "We've got some next-generation technology and we're going to split off that production line. So it's going to be heavily concentrated in Q4 and probably even [more] heavily in November and December. But I think it's going to be really exciting when people see it. So, that's why I expect kind of exponential growth from there. I think it's really going to go ballistic."

He added, "What I'm highly confident of is that the next generation of stationary storage is head and shoulders above anything else that I've even heard announced as future plans from other companies."

Things that are hard: Production, according to Musk:

  • "We've just got to scale up production, and production is a hard thing. It's [really] hard, particularly when it's new technology. If it's some standard technology that's been made for a long time, it's fine. If it's cutting-edge technology, it's really hard to scale up production, because you've got to design the machine that makes the machine, not just the machine itself."
  • "Basically, we were in production hell for the first six months of this year. Man, it was hell. And then we just managed to sort of climb out of hell partway through June. And now the production line is humming and our suppliers mostly have their shit together. There's a few that don't -- one I'm going to be visiting on Saturday personally to figure out what the hell's going on there. But we'll solve it. But the thing that's crazy-hard about cars is that there's several thousand unique items, and you move as fast as the slowest item in the whole car."

Things that are nutty: "It's important to bear in mind...as a manufacturing company, our percentage growth, I think it's unprecedented in the modern era. It's really nutty. I mean, in 2010, we were making 600 cars a year and Lotus was doing the body and chassis. Five years later, we were making 50,000. And it was a much more sophisticated car with Model X, and we were doing the whole car without any partner."

"So it's just real important to parse things out and to understand what the real health of the business is. Right now, I mean in a nutshell, we're shipping $10 billion a year of product on an annualized basis at somewhere around 23 percent to 25 percent gross margin."

New models: "I think there's going be some pretty exciting unveils for the Tesla Semi and Tesla Minibus (or bus) -- we don't have a name for it yet."

Alien dreadnought: "The Model 3 -- the internal name for designing the machine makes the machine is...'the alien dreadnought.' At the point at which the factory looks like an alien dreadnought, then you know you've won. It's like, what the hell is that? So we've got alien dreadnought version 0.5, [which] will be Model 3. It will take us another year to get to version 1 and probably a major version every two years thereafter. By version 3, it won't look like anything else. It might look like a giant chip pick-and-place machine or a super-high-speed bottling or canning plant, and you really can't have people in the production line itself. Otherwise, you automatically drop to people speed. There's still a lot of people at the factory, but what they're doing is maintaining the machines, upgrading them, dealing with anomalies. But in the production process itself, there essentially would be no people. With version 1, not version 0.5. But I don't want people to think, 'Oh, Tesla's going to have a factory without people.' It's going be a huge number of people, but they will be maintaining machines and upgrading the machines and dealing with anomalies. And the output per person will be extraordinarily high."

Autonomous driving

"Full autonomy, it's really a software limitation. The hardware exists to create full autonomy, so it's really about developing advanced, narrow AI for the car to operate on. I want to emphasize narrow AI -- it's not going to take over the world, but it needs to be really good at driving a car. So, increasingly sophisticated neural maps that can operate in reasonably sized computers in the car -- that's our focus. I'm very optimistic about this. It's exciting, it blows me away, the progress we're making. So I think if I'm this close to it and it's blowing me away, it's really going to blow other people away when they see it for the first time."

Musk said that Tesla will have a “more significant announcement” about Tesla's internal solution on proprietary mapping initiatives. He added, "There's a need to have much higher-definition maps than currently exist anywhere in the world in order to have full autonomy. And we're in the process of building those and, I think, making good progress."

"All I'd say is that full autonomy is going to come a hell of a lot faster than anyone thinks it will. And I think what we've got under development is going to blow people's minds. It blows my mind."

Insourcing integrated inverters

Now that Tesla owns a residential and commercial solar installation and module manufacturing business via its recent $2.6 billion SolarCity acquisition, Musk said, "Yeah, there's no question Tesla's going to do an integrated inverter. It's the logical thing to do. We've got the most advanced inverter engineering team in the world, and so it makes sense to, just as we do the inverters on vehicles, to do it with solar as well and have it in a very tight package at a cents-per-watt level that is twice as good as anyone else. I think maybe better than that."

When I discussed this aspiration with a solar inverter expert, the ensuing tirade suggested that Musk might be out of his depth and that moving from an EV inverter (more akin to an industrial motor drive) to a solar string inverter or module-level power electronics was "a completely different problem. The only thing that's the same is the name." The expert pointed out the vastly differing signal requirements, duty cycles and cooling needs of the two technologies.

SolarCity currently relies on string inverters from a variety of vendors and panel optimizers from SolarEdge. SolarCity also owns microinverter IP from the defunct Enecsys.

Guidance

  • Tesla executives are sticking with their previous 2016 targets despite a slower-than-anticipated Q2. Tesla guided to shipments of 50,000 in the second half of 2016.
  • Tesla looks for automotive gross margins to improve by 2 to 3 percent. 
  • Tesla raised $1.5 billion of equity in Q2, but Musk said that Tesla would require an additional “modest” equity chunk to stake the Model 3.
  • “Total non-GAAP operating expenses should increase sequentially in Q3 and Q4, and we now expect full-year 2016 total non-GAAP operating expenses to increase by about 30 percent. The increases come from engineering, design and testing expenses related to Model 3 supplier contracts, and higher sales and service costs associated with expanding our geographic presence.”

Model 3 reservations, retail stores, production ramp and more

  • Model 3 reservations still number approximately 373,000.
  • The new lower-end Model S 60 and 60D have been pulling some customers from the Model 3 waitlist. 
  • Baird notes the company’s goal of exiting Q3 at a ~2,200 vehicle per week run-rate and Q4 at ~2,400 vehicles. Baird estimates Tesla will deliver ~21,000 vehicles in Q3, and deliver ~29,000 vehicles in Q4 -- roughly half Model S, half Model X, according to Musk.
  • Oppenheimer notes that "insourcing and aggressive supply chain management appear to be key trends."
  • Tesla expects an increase in direct leasing in Q3 '16 since its banking partner has met its lending limit. Tesla looks to add new leasing partners and sees a shift from leases to loans ahead.
  • Gigafactory "construction remains on target to support volume production of Model 3 in late 2017, and we recently accelerated construction to reach a rate of 35 GWh/year of cell production in 2018."
  • "We are also accelerating store openings and plan to add a new retail location every four days on average during the remainder of Q3 and through Q4. We are adding stores in new population-dense markets like Taipei, Seoul and Mexico City, while also adding stores in our most mature markets like California. The quality of our new locations is also improving, as many shopping malls now consider us the new standard for an anchor tenant based on the amount of foot traffic that we draw and our very high revenue per square foot."
  • Employee headcount including SolarCity is now roughly 30,000.

Here's one last bit of invective from Musk: "I really want to emphasize this quite strongly, and I hope it does get picked up in the media. The California Air Resources Board is being incredibly weak in its application of ZEV credits. The standards are pathetically low. They need to be increased. There's massive lobbying by the big car companies to prevent CARB from increasing the ZEV credits mandate, which they absolutely damn well should. It's a crying shame that they haven't. And as a result, you can barely sell the ZEV credit for pennies on the dollar. CARB should damn well be ashamed of themselves."