Is there any upside left in Tesla’s share price?

Tesla’s [TSLA] share price is having a volatile month. Bumper earnings — a typical driver of Tesla’s share price — haven’t had the expected impact.

Now, Tesla’s profitability has been called into question as there may be fewer EV manufacturers relying on purchasing tax credits from the EV giant in future.

Over the past month, Tesla’s share price is down circa 6% (as of 11 May’s close), and 23% over the three month period. Trading around the $617 level, the stock is below both its 50-day and 200-day moving average, and light years away from its $900.42 52-week high. Does Tesla’s share price have any near- to mid-term upside? We look at whether the dip is an opportunity, or if investors should steer clear.

 

Why Tesla's share price dip is an opportunity

Tesla’s share price has form dipping after quarterly earnings, according to CNBC’s Phil LeBeau.

“Not a surprise that Tesla shares started trading lower after the company recorded better than expected earnings for the first quarter. Historically, Tesla’s stock runs up before an earnings report then sells off after the earnings come out, even if they are better than expected numbers.”

LeBeau added in an interview with Pippa Stevens on CNBC’s After Hours that, if investors are bullish on Tesla and believe it will “transform the automotive industry” and will lead the industry in the future, then there was a lot to like in the report.

“Not a surprise that Tesla shares started trading lower after the company recorded better than expected earnings for the first quarter. Historically, Tesla’s stock runs up before an earnings report then sells off after the earnings come out, even if they are better than expected numbers” - Phil LeBeau

 

Tesla posted a record $438m in net income, with revenue coming in at $10.39bn — a 74% year-on-year jump. Tesla delivered 184,800 Model 3 and Model Y vehicles in the first quarter, adding that a new version of the Model S sedan will start to be delivered this month (May 2021). $101m made in selling bitcoin and a record $518m sale of EV credits was also added to the coffers.

In a statement accompanying the earnings, Tesla said that, despite the semiconductor shortage, it had moved “quickly to new microcontrollers, while simultaneously developing firmware for new chips made by new suppliers”.

All in all, Tesla carries an average $663.16 average price target from the analysts tracking the stock on Yahoo Finance — a 7.45% upside on the current price (as of 11 May’s close).

 

Why Tesla’s share price dip is a problem

Critics will point out that Tesla’s profit was down to the half a billion dollars in credits sold to other automobile manufacturers and the bitcoin sales, helping to mask the underlying loss of its car business.

EV credits are sold between automobile manufacturers to make sure they are in compliance with emission targets in different jurisdictions. As other automobile manufacturers start to roll out their own EVs — and lower their emissions — they won’t need to buy these credits from Tesla.

Stellantis [STLA], which owns Fiat, Dodge and Alpha Romeo, is one such company, having bought $2.4bn in EV credits from Tesla between 2019 and 2021, according to Business Insider. Stellantis is on track to meet its carbon dioxide emission targets this year and has said it will not purchase credits from Tesla.

“The increased awareness of the role that carbon tax credits play in the company's profitability may lead to a fundamental re-valuing of the company in the coming year” - Louis Navellier, chief investment officer at Navellier

 

"The increased awareness of the role that carbon tax credits play in the company's profitability may lead to a fundamental re-valuing of the company in the coming year," wrote Louis Navellier, chief investment officer at Navellier. The analyst also said the loss of regulatory credit sales could be “devastating” to Tesla.

 

Where next for Tesla’s share price?

Profitability is the big question mark for Tesla’s share price now. Getting more vehicles out the door will certainly help. Expansion in the US, a gigafactory in Shanghai and a new factory in Berlin shows Tesla is ramping up production. Elon Musk has said Tesla will increase deliveries by at least 50% this year, which would bring the total to somewhere around 750,000.

Even if EV credits were stripped out of earnings, Tesla would still have a better-than-expected 22% automotive gross margin — as it happened, this metric came in at 26.5% for the most recent quarter, up 100 basis points year-on-year.

Tesla’s share price dip comes as the EV theme continues to gather traction more generally, and smaller firms are seeing sales rise. Among the major, traditional manufacturers, analysts at UBS have tipped Volkswagen [VOWG] to rival Tesla in the coming years, while General Motors [GM], Toyota [7203] and Ford [F] are all pumping large sums as they transition from petrol to electric vehicles.

This will pose stiff competition for Musk’s firm. However, if the company can become profitable on its own terms, Tesla’s share price could still be a buy.