Tesla Earnings Were Strong. But the Real Story Is Margins.

Analysts were projecting second-quarter earnings per share of about $1.83 from $16.9 billion in sales. It’s a another bottom line beat for the company, Tesla’s six consecutive earnings beat, according to Bloomberg.

But Q2 earnings and sales were down compared with the first quarter of 2021. In Q1, Tesla reported EPS of $3.22 from sales of about $18.8 billion.

The sequential decline in earnings was expected because of China’s lockdowns to fight Covid-19, which constrained production and left Tesla with fewer electric vehicles to sell. Tesla delivered about 255,000 EVs in the second quarter, down from about 310,000 in the first quarter.

At 6 p.m. eastern time, Tesla shares were up about 1% in after hours trading. Shares rose 0.8% in regular hours trading, closing at $742.50. Tesla stock has posted gains for six consecutive trading sessions.

Automotive gross profit margins, excluding regulatory credits Tesla earns by selling more than its fair share of zero emission vehicles, came in at about 26%, down from 30% in the first quarter of 2021. Still, margins were a little better than the Street projected. 

What’s more, Tesla gross profit continue to be better than automotive peers. General Motors (GM) and Volkswagen (VOW3. Germany) are expected to generate Q2 gross profit margins of roughly 16% and 18%, respectively.

Operating income came in at $2.5 billion, down from a record $3.6 billion reported in the first quarter. It was the company’s third best quarterly operating profit ever.

Along with $1.83 in per-share earnings, analysts projected about $570 million in free cash flow for the second quarter, down from about $2.2 billion generated in the first quarter.

Tesla reported $621 million in second quarter free cash flow. That looks like a solid result. New Street Research analyst Pierre Ferragu was worried Tesla would generate no free cash flow in the second quarter.

“Expectations are not aligned with the impact lower deliveries will have on working capital,” wrote Ferragu in his preview report.

The cash impact from when the company pays its bills and receives what it is owed is typically positive when deliveries are growing. The opposite is true when deliveries are down, as they were in the second quarter. Working capital appears to have been a drag on cash flow, but the impact wasn’t as bad as Ferragu expected.

There was an expected write down of Bitcoin holdings, but it was much smaller than expected at $106 million. Tesla avoided a bigger charge because it sold about 75% of its Bitcoin holdings during the quarter. The Bitcoin impairment wasn’t included in the $2.27 adjusted EPS figure.

Tesla reported $1.95 in EPS based on generally accepted accounting principles, or GAAP. That number includes the Bitcoin charge. That’s also better than the $1.41 in GAAP EPS Wall Street was projecting.

Ferragu was worried about free cash flow, but he doesn’t seem to be worried about the impact the second-quarter results would have on Tesla stock in the long run. He is a Tesla bull, rating shares a Buy. His price target is $1,580 a share. He seems to believe investors would look past the rocky results and focus on the rest of the year.

Tesla believes the rest of the year looks bright. It still trumpets 50% average annual volume growth in its news release. CEO Elon Musk said on the company’s earnings conference call that he expects a record second half of 2022.

Today, Wall Street expects about 835,000 unit deliveries in the second half of the year. Tesla delivered 564,753 vehicles in the first half.

Options markets imply that Tesla stock will move about 7%, up or down, following earnings. Shares have moved about 5%, up or down, on average following the past four quarterly reports. Shares have risen twice and declined twice over those past four reports. The biggest change was an 11.6% drop after Tesla reported its fourth-quarter 2021 numbers.

Tesla stock is down 30% so far this year, worse than the 17% and 12% respective declines of the S&P 500SPX +0.59%  and Dow Jones Industrial AverageDJIA +0.15% .