Tesla Analyst Tells Why Q2 Margin Shrinkage Shouldn't Be A Issue For The Stock: 'The Long-Term Question Is...'

Tesla, Inc. TSLA is scheduled to report its second-quarter results Wednesday after the market close. Analysts, on average, expect earnings per share to rise year-over-year from $0.76 to $0.82 and revenue to jump 44.50% to $24.48 billion.

One thing that has left investors worried about is the auto gross margin, excluding regulatory credit, given expectations that price cuts and discounts may have eroded margins further.

One analyst, however, is not too concerned about the deterioration in the margin profile.

What Happened: The key topic obviously for earnings is going to be auto gross margins ex-credits, and the Street is looking for it to come in at 19%, said Gene Munster, Managing Partner at Deepwater Asset Management, in an interview with CNBC. The fund manager expects it to come in at between 17-18%.

"I don’t think that’s gonna be an issue for the stock ultimately because I think the commentary from the CFO is going to be to expect improving gross margins throughout the back half of the year," Munster said.

The analyst, however, is positive about the outlook and wishes to have the conversation focused on the long term. The long-term question is not about auto gross margin, excluding credits, but about whether Tesla can get to 10-20% of the market share when eventually EVs account for 100% of the vehicles sold, he said.

Even if Tesla gets a 10% share in a decade, it is a $1.1 trillion business compared to the $130 billion revenue it is expected to report this year, Munster said.

See Also: Everything You Need To Know About Tesla Stock

Betting On Margin Improvement: Munster expects the margin to improve in the back half of the year and if it doesn't, it is likely to improve in 2024. He said Tesla is ramping up production at Giga Austin and the 4680 battery, lithium prices are going down that benefits Tesla more than it benefits Ford Motor Co. F, adding it is his base-case expectation.

"Margins have been down, but I think that they will rally back after this year into next year,” Munster said. Traditional automakers' EV businesses are getting smoked right now on the margin front, he noted. 

Ford's EV division is losing 40% and Polestar Automotive Holding UK Plc PSNY about 45%, while Tesla is making about 15% operating margin.

"I think they’re [traditional automakers] gonna continue to have struggles to improve those margins because it’s not just about ramping production," the fund manager said.

"They have to redo their factories, rework their labor contracts, redo their software stack, change their distribution network. They have to start to adopt a more nimble, profitable playbook," he added.

Tesla ended Tuesday’s session up 1.02% to $293.34, according to Benzinga Pro data.

Check out more of Benzinga’s Future Of Mobility coverage by following this link.

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