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Tesla share price rallies, but is a margins reckoning looming?

As Tesla’s [TSLA] stock reeled from a dismal half-year that saw it drop to the lowest since December 2016, all eyes turned to Q2 deliveries as a health check between quarterly earnings statements.

This round, it was the bull camp that got momentarily vindicated. In a statement late on 2 July Tesla said it had delivered 95,200 vehicles, well above a FactSet analyst consensus of 91,000. The carmaker’s Nasdaq-quoted stock opened 6.7% to $239.38 the next day. Just a month earlier, share price was dipping below $179 – a 30-month low.

In the words of Wedbush Securities analyst Daniel Ives, Tesla “remains a prove-me story”. A year ago, it was all about whether the company could churn out enough cars to meet orders. Now, attention has moved to demand as Musk seeks an ambitious 360,000 to 400,000 deliveries by year-end. Ultimately, however, those numbers must feed into bottom-line figures. That, analysts say, is when the penny may drop – perhaps as soon as this quarter.

 

 

Have deliveries come at the expense of margins?

The delivery record did manage to surprise most observers. “We had not spoken to any investors that expected deliveries to be this high,” wrote Morgan Stanley’s Adam Jonas. The figure was up by almost a third on Q1’s dismal 63,000 deliveries. But the numbers beg some context.

JP Morgan’s Ryan Brinkman noted Q2 was “a pre-buy quarter” ahead of a climbdown in tax credits available to Tesla’s US customers, which on 1 July went from $3,750 to $1,875. That had also been the case for Q4 2018, which hit a then-record 90,700 deliveries just as the federal tax credit, originally worth $7,500, was about to be halved.

What’s more, Q2 saw the launch of lower-priced variants and leasing options for the Model 3, along with price cuts on the Model X SUV and the Model S sedan – all of which points to Tesla’s willingness to put turnover ahead of profits, some analysts conclude. “We find the company’s intense focus on hitting short-term targets somewhat curious for a story supposedly long-term focused,” wrote RBC Capital Markets’s Joseph Spak, who has an underperform rating and a $190 price target.

“We find the company’s intense focus on hitting short-term targets somewhat curious for a story supposedly long-term focused” - RBC Capital Markets’s Joseph Spak

 

Brokers stick to their views

The deliveries surprise did not prompt major revisions from analysts, proving that when it comes to Tesla, you’re either ‘forever a bear’ or ‘forever a bull’. In late June, Goldman Sachs’s [GS] David Tamberrino settled into the former camp for good, as he cut his price target from $200 to $158 in his fourth revision of the year. Last week’s deliveries did not change his opinion that demand for Tesla cars will ultimately dissipate.

However, Dan Levy from Credit Suisse [CS] forecast positive free cash flow this quarter – but that is modelled on “positive working capital” from “streamlined global logistics”, rather than any improvement on vehicle margins.

Meanwhile, on the bull side, Ben Kallo at Baird said the “extremely strong deliveries… set the stage for strong Q2 results,” and kept a $355 price target. Macquarie’s Maynard Um holds a loftier target of $400 on the belief that order backlog, model mix refresh and the opening of the Shanghai Gigafactory 3 next year will create steady support for sales. As for share price, any updates on strategy and expansion from management – starting with Q2 earnings later this month – will provide a catalyst, Kallo believes.

 

Market cap$41.04bn
EPS (TTM)-5.69
Profit margin-4.29%
Quarterly revenue growth (YoY)33.20%

Tesla share price vitals, Yahoo Finance, 9 July 2019

 

The buy-side perspective

Still, bulls and bears can agree on at least two things. One is that, right now, short sellers are getting squeezed. “[They] have to go back into their caves and hibernate,” Wedbush’s Ives told CNBC.

The other is that it remains extremely difficult to get a clear-cut picture of Tesla just by looking at traditional metrics. “If you want to own a company like this… you're owning the belief in the entrepreneur, the optimism surrounding the technology. But you cannot own this stock on a fundamental reason,” Quint Tatro, chief investment officer at Joule Financial, recently told CNBC.

He added: “There's no reason to be a buyer here, or – quite frankly – until they get these financial numbers figured out and we know, really, where the company stands.”

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