Key Takeaways From Tesla & Snap Earnings

Earnings reports and guidance are an under-utilised gauge of economic health. Obviously, they’re far less scientific and structured than the economic data, but combining the sources can give a broader perspective of what’s really going on in an economy.

Tesla is a special case. In many ways, the company has operated independently of economic fundamentals, and some would argue that the share price has (and still does?) too.

Tucked away in the earnings report this week was the news that Tesla had sold 75% of the company’s Bitcoin holdings, adding $936 million cash to the balance sheet to increase liquidity.

China’s Covid lockdowns impacted total production, but far more concerning was the drop in Tesla’s core profit margins which fell from 32.9% in Q1 to 27.9% in Q2. Tesla’s margins are still high relative to their competitors, but the results hint that the current economic headwinds are having an impact.

The fact that margins have taken a hit despite Tesla’s flurry of price hikes raises questions too. Can the company keep raising prices and expect demand to remain steady? Musk says no:

"You can't kind of just raise prices to some arbitrarily high level because you pass the affordability boundary and then the demand falls off a cliff. Prices are frankly at embarrassing levels. But we've also had a lot of supply chain and production shocks and we've got crazy inflation"

There’s also the looming Twitter case for Musk to personally deal with in October. If the judge rules that the $44bn purchase must proceed, will Musk be tempted to sell more Tesla shares to help fund it?

Snap’s sales disappointed

Although second-quarter revenue grew by 13% to $1.11 billion, the company missed expectations, posted a higher than expected net loss of $422 million, and withdrew financial guidance amid economic uncertainty.

Snap’s share price fell drastically in after-hours trade:

In a letter to investors Snap said that the second quarter of 2022 “proved more challenging than we expected”, and despite an increase in Daily Active Users (DAU) to 347 million, “our financial results for Q2 do not reflect the scale of our ambition. We are not satisfied with the results we are delivering, regardless of the current headwinds.”

While this statement is indicative of a drive to improve results, it’s really not clear that Snap, or anyone else, can do much to rapidly overcome the current challenges.

In the subsequent earnings call, Chief Financial Officer Derek Andersen commented that “We’re seeing the overall advertising pie grow at a smaller rate, and that essentially intensifies the competition”.

This issue was also alluded to in the investor letter, “the combination of macroeconomic headwinds, platform policy changes and increased competition have limited the growth of campaign budgets,”

Strip away the corporate jargon, and it seems that the wider economic situation is causing companies to pull back on their advertising spending. Instead, a focus on cost-cutting is coming to the foreground.

Snap “intend(s) to substantially slow our rate of hiring, as well as the rate of operating expense growth.”

If the same is true for many of their customers, that’s a real headwind for growth prospects.