Tesla share price: Third quarter deep dive

Third quarter quick take

• Tesla shares jump in after-hours trade following Q3 release
• The automaker beat Street revenue, EPS and FCF estimates
• Musk reiterates ~500,000 CY20 deliveries target

Earnings deep dive

Betting against Elon Musk has proven to be a hazardous enterprise in recent times, with the Tesla (TSLA) share price up 391% YTD.

As the electric vehicle company ramps up production and begins to turn a profit, it has faced intensifying scrutiny, as detractors criticise everything from Tesla’s valuation, accounting practices and approach to corporate governance.

Despite those criticisms – Tesla again beat Street expectations when it revealed its third quarter results to the market yesterday, reporting its fifth straight quarter of profitability, impressive top-line growth and solid free cash flow (FCF).

The market responded bullishly to this release, bidding the stock up 3.22% or $13.67 to $436.31 per share in after-hours trade. At the close of Wednesday’s session, Tesla touted a market capitalisation just shy of $400bn – making it the world’s most valuable automaker.

Heading into the Q3, analysts were expecting Tesla to report revenues of $8.36bn, adjusted earnings per share (EPS) of 55 cents, and free cash flow of $1.11bn. Overall, Tesla beat on all those key metrics, reporting third quarter revenues of $8.77bn, adjusted EPS of 76c and free cash flow of $1.40bn.

Though some have questioned Tesla’s status as a growth stock, particularly after the company posted sluggish top-line growth in the quarter prior, the Q3 looks to represent a solid rebuttal to such doubts, with Tesla posting automotive revenues of $7.61bn (+47% QoQ) and total revenues of $8.77bn (+45% QoQ).

Tesla said this impressive growth came as a result of ‘substantial’ improvements in vehicle deliveries, as well as other parts of the business, while also flagging that ‘vehicle average selling price (ASP) declined slightly compared to the same period last year as our product mix continues to shift from Model S and Model X to the more affordable Model 3 and Model Y.’

The automaker, having already released its Q3 vehicle product and delivery stats prior to the full earnings release, reported total production of 145,000 vehicles (+76% QoQ) and total deliveries of 140,000 vehicles (+54% QoQ) in the latest quarter.

Underscoring management’s above commentary around changing product mix demands, of the ~140,000 deliveries made in Q3, 124,100 were Model 3/Y, while just 15,200 were Model S/X.

Looking forward, Tesla reiterated its 2020 target of delivering 500,000 vehicles by the year’s end, though noted that this goal has become more difficult to achieve. Over the last three quarters, the automaker has made a total of ~318,000 deliveries, suggesting that the company would need to see an approximately 30% QoQ uplift in deliveries to hit the above flagged milestone.

‘Achieving this target depends primarily on quarter over quarter increases in Model Y and Shanghai production, as well as further improvements in logistics and delivery efficiency at higher volume levels,’ Tesla said.

In the wake of the quarterly release, long-time Tesla bull, Ross Gerber, CEO of Gerber Kawasaki Wealth and Investment Management, Tweeted:

‘Tesla capacity in Shanghai is now 250k cars per year up from 150k. Total capacity now close to 750k cars over the next 12 months. This will continue to grow over time.’

Credit sales decline, profit margins improve

Beyond strong delivery and revenue growth, Tesla also saw its gross margins improve, rising 253bp to 23.5% in Q3. In addition to that, operating margins rose from 5.4% (Q2) to 9.2% despite stock based compensation reaching $543m – $290m of which was received by Elon Musk after meeting a number of operational milestones.

Management noted that this improved profitability was driven by ‘strong volume, better fixed cost absorption and continuous cost reduction,’ while also saying that over time the expectation was for the company’s profit margins to reach industry leading levels.

Finally, though many derided Tesla’s reliance on the sale of regulatory credits in the prior quarter, its reliance on these instruments declined steeply in during the third quarter, falling 7% to $397m.

Tesla share price: A long history of miscommunication

With Tesla again beating estimates, one is left wondering if the investment community truly understands the business.

Renowned venture capitalist, Chamath Palihapitiya, looking at this knowledge gap, on CNBC recently argued that:

‘Tesla is no longer about the car business. The value of this business is about deregulating energy. That's about batteries and battery storage and it's about disrupting utilities. It is about the combination of hardware and software that will give all of us individuals the ability to be energy independent and I think that is a fundamentally disruptive thing.’

Mr Palihapitiya finished by saying that:

‘Tesla continues to be underestimated. I think it is generally misvalued and I think the people that are trying to compete with them are not the people they are competing with.’

Tesla’s valuation for many has proved confounding for a long period of time: At its last quoted price, TSLA stock trades on a staggering ~1,129x earnings multiple and a ~16x sales multiple – more like a tech company than a traditional automaker. Japanese automaker – Toyota Motor Corporation – by comparison trades at ~13x earnings and sub 1x sales, while General Motors (GM) trades at ~34x earnings and just 0.447x sales.

One side will argue that Tesla is simply an overvalued bubble stock and that Elon Musk, for all his charisma and supposed genius has simply overpromised and underdelivered.

Others, committed to the narrative that Tesla is a game changing company – not just for electric vehicles but for batteries and battery technology, energy, software and even autonomous driving – may even go as far to say that Tesla is actually undervalued at current price levels. Afterall, the shift to electrification and decarbonization, according to Palihapitiya ‘is worth trillions of dollars.’

Tesla share price: The analyst outlook

As has long been the case, the analyst outlook on Tesla over the last month has proven as divisive as ever. Heading into the Q3:

• Oppenheimer reiterated their Buy Rating
• JP Morgan raised their price target from $65 to $75
• New Street Research reiterated a $578 price target and lifted their rating from Neutral to Buy
• Credit Suisse set a $400 price target on the automaker
• Citi reiterated their Sell rating but bumped up their price target from $110 to $117
• Goldman assigned the stock a Neutral rating and $450 price target

Ultimately, with Tesla delivering its fifth consecutive quarter of profits, it will be interesting to see how the sell-side reacts to the automaker’s Q3 report in the coming days.

One wonders if – in Mr Palihapitiya’s words – Tesla will continue to be underestimated.

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