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Stock Deconstruction

Is Tesla’s share price a buy after the unexpected earnings beat?

A controversial CEO, repeatedly missed earnings targets, and problems at its factories has made Tesla [TSLA] one of the most shorted share prices on Wall Street since its initial public offering in 2010. But the shock news that Tesla’s return to profit during Q3 earnings has left some analysts wondering if investors might see more positive developments from the company, and its stock.

 

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On 23 October, the electric car manufacturer surprised with earnings per share of $1.91, compared to an expected loss per share of $0.24. As a result, the share price surged by nearly 30% in the three days following the announcement. Investors and traders short selling the stock were hit with $1.4bn in mark-to-market losses, wiping out close to 70% of their profits for the year as the stock is up around 5% year-to-date.

30%

Amount Tesla's share price surged by after Q3 earnings

  

The recent change in Tesla’s fortunes was evident at the beginning of October, when it released a preliminary Q3 vehicle production and deliveries report. The numbers revealed that the company had produced 96,155 vehicles during the quarter and delivered 97,000 to customers.

Both were record numbers for the company and investors had been focused on these two areas for signs of growth ahead of the earnings announcement. To add to the good news, Tesla received approval to begin production in China, pitting the company against domestic electric carmakers such as Nio [NIO].

 

 

A short history

There are a number of issues that have caused Tesla stock to be volatile since it went public nearly a decade ago and which have made it the highly shorted stock it is today.

Several public comments made by CEO Elon Musk have sent its stock diving over the past few years. Most notably, Musk tweeted on 7 August 2018 that he was considering taking the automaker “private” and that it had “funding secured”. This prompted a legal battle with the US Securities and Exchange Commission, which was later settled. Such unpredictability from Musk, which is quite common, often puts investors on tenterhooks.

Meanwhile, the business has reported a number of revenue misses in recent history. Its Q1 sales of $4.54bn were below the $5.19bn expected, Q2’s $6.35bn was less than the $6.41bn expected, and the Q3 figure of $6.3bn missed expectations of $6.43bn.

$6.3billion

Tesla's Q3 sales vs. $6.43bn expected

  

Furthermore, Tesla factories have consistently missed production targets. Back in 2016, the company said it aimed to build 100,000 to 200,000 Model 3 cars during the second half of 2017. Musk then stated that Tesla would aim to build 5,000 cars per week, which it failed to achieve throughout that year and in 2018.

Toward the end of 2019, Tesla has predicted that it will deliver 360,000 to 400,000 vehicles. But its recent record-breaking Q3 figures were shy of the 100,000 vehicles that the company had promised for the quarter.

Tesla’s share price was £317.47 at close on 1 November while Toyota [TM], whose New York-listed stock was trading around $140, produces millions of vehicles per year. Such a comparison suggests that Tesla stock could be overvalued.

Then there’s the fact that Tesla has recently been the subject of a number of investigations into workplace safety. Earlier this year, a review by Forbes found 25 investigations by California’s Occupational Safety and Health Administration from 2014 to 2018, resulting in fines for 54 violations. By comparison, Nissan’s plant in Tennessee was the subject of eight investigations and had just five violations in the same period.

 

A reboot at Tesla

Part of the positive momentum Tesla has seen recently can arguably be traced back to last year, when Musk agreed to step down as board chairman for at least three years and board member Robyn Denholm named as his replacement. He also agreed to pay a $20m fine to settle the lawsuit brought by the SEC over his controversial tweet about taking Tesla private.

The company has also made waves in the much-coveted Chinese market, seeing its most rapid growth in the region. Its Q3 earnings results showed that US sales, which account for the biggest share of the company’s total revenue, tumbled by 39% as those in China rose by 64%.

Tesla’s Model 3, Model S and Model X have been exempted from a Chinese purchase tax resulting from the US-China trade war. Along with Tesla getting the green light to start production in China.

Meanwhile, there is optimism that Tesla could begin to increase its output capability, as it saw record production figures for the latest quarter and announced its $2bn “gigafactory” in China is on its way. The electric automaker currently aims to make 3,000 cars a week at its plant in Shanghai.

 

Market cap$58.392bn
EPS (TTM)-4.77
Return on Equity (TTM)-10.45%
Quarterly Revenue Growth (YoY)-7.60%

Tesla share price vitals, Yahoo Finance, 07 November 2019

 

Analysts’ views

"Tesla delivered a potentially game-changing third quarter, with surprise profitability and strong cash flow signalling what could be a new era for Musk going forward," Wedbush analyst Daniel Ives said in note to clients. He raised his target price for the stock to $270 from $220 and kept his rating at neutral. However, Ives’s target price is 17% below the current share price.

“OTesla delivered a potentially game-changing third quarter, with surprise profitability and strong cash flow signalling what could be a new era for Musk going forward” - Wedbush analyst Daniel Ives

 

Deutsche Bank analyst Emmanuel Rosner also raised his target price for Tesla, to $260 from $245, but kept his hold rating.

He said in a note to clients that in the near term investor sentiment could continue improving, but that “focus will now rapidly shift to the next company milestones, in particular ramping up the Shanghai (factory) and launching Model Y, both of which offer large additional earnings potential, but also carry significant operational execution risk”.

 

Short sellers may still have a case

There are many who still doubt that Tesla can produce and sell the number of cars needed to match its share price. Analysts at Roth Capital Partners cast doubt on the quality of Tesla’s third-quarter earnings beat. They downgraded their rating on Tesla’s share price to sell from hold, saying they remained cautious about the stock because of expectations of slower delivery growth in 2020.

Analysts at Cowen noted that some of the positive aspects of Tesla’s Q3 results may not be repeated and, worse, could be setting investors up for future disappointment, as Tesla’s sales are expected to remain sluggish in the next few quarters.

“The stock has performed well on the headline (third-quarter) profitability results, but we continue to see Tesla as significantly overvalued given the challenging prospects the company is facing with its current product lineup (S/X/3) and our skepticism of the narrative shift to future growth drivers,” including the Model Y, the Tesla semi freight truck and its solar products, Cowen analysts said in a note.

“The stock has performed well on the headline (third-quarter) profitability results, but we continue to see Tesla as significantly overvalued given the challenging prospects the company is facing with its current product lineup (S/X/3) and our skepticism of the narrative shift to future growth drivers” - Cowen analysts

 

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