Tesla’s ‘Picasso-Like’ Quarter Still Has Some Skeptics
Here’s What Wall Street Is Saying About Tesla’s Surprise Profit
(Bloomberg) -- Tesla Inc. shares surged in early trading on Thursday after the electric carmaker posted an unexpected profit that was the first in almost a year.
The market’s jubilance was not exactly matched by Wall Street analysts, who said the company still has work to do to prove it can hold onto these profits in the future quarters. JP Morgan sounded a sobering tone, saying it was “not sure this is the breakout quarter claimed.”
The company also said it was “highly confident” of reaching the lower end of its prior annual delivery forecast of 360,000 to 400,000 units, and that it was ahead of schedule on a new car plant and the launch of new Model Y crossover. Tesla earned $1.86 a share in the third quarter, exceeding the most optimistic projection by a wide margin, and beating the consensus estimate for a 24-cent loss.
Tesla shares were up more than 18% in pre-market trade.
Here’s a round up of the analyst commentary post-results.
Baird, Ben Kallo
(outperform, $355)
- Tesla did “lower 2019 volume guidance, though paradoxically we think this will drive estimates higher as investors are better able to bridge to fourth-quarter deliveries”
- “We think ramping volumes (especially in Shanghai) and product development will provide a steady cadence of catalysts over the next 6-12 months and expect shares to trade higher”
Piper Jaffray, Alexander Potter
(overweight)
- Tesla’s share gain in after-hours is “justified” as it posted “a surprising profit,” the broker said, adding that “it’s getting harder to poke holes in the TSLA thesis”
- While skeptics had “legitimate concerns” in the past, the company is now building cash, winning market share and boosting margins, while readying to launch products in untapped segments and regions
- “Even considering all the EV-related fanfare from competitors, it’s hard to see how other auto companies can catch up with Tesla -- at least in the next 3+ years”
- Believes investors underestimate Tesla’s ability to consolidate the automotive market
Wedbush, Daniel Ives
(neutral, PT $270 from $220)
- Tesla delivered a “Picasso-like quarter last night with profitability and Ebitda approaching $900 million, that speaks to a business model which has significantly lower costs, more production efficiency, and automotive gross margins approaching 23% which is extremely impressive on the heels of the lower margin Model 3 shift”
- “Adding to the World Series-like celebration among bulls will be the flagship Giga 3 already in trial production mode ahead of expectations, which is key to penetrating the important China market over the coming years”
- “Is demand and this level of profitability sustainable? That will be the key question for the Street this morning as the bull/bear debate will view this quarter as Musk and Fremont pulling an eye popping quarter out of the hat with worries that the lack of investments and tighter expense model is not sustainable going forward”
Roth Capital, Craig Irwin
(neutral, PT up to $249 from $224)
- Tesla posted “robust” EPS on gross-margin strength in the third quarter; the carmaker’s volatile quarterly EPS progression should have investors “closely scrutinizing sustainable profit levels, and credible growth rates in an increasingly competitive environment”
- Projects that decelerating deliveries growth in 2020 will drive multiple compression and is cautious at current levels
Evercore ISI, Arndt Ellinghorst
(underperform, PT $200)
- “While we remain concerned on 2020 momentum/profitability, we acknowledge this was an outstanding quarter relative to expectations, despite headwinds of lower average selling price and facility tooling which we expect to increase as we approach Model Y launch next year”
- “While capex at 5% of revenue is unlikely to be sustainable long term given growth ambitions, such frugality will be appreciated by bulls as Tesla tries to prove its thesis that it has become a self-sustaining operation”
Citi
(sell)
- More positives than negatives as Tesla posts a quarterly beat driven by higher gross margins, lower operating expenses and higher “other-income”
- While an initial positive stock reaction is “understandable” given the underperformance this year and the clear progress in margin and free cash flow, Citi’s impression is that it “won’t necessarily resolve all prevailing bull/bear debates seeing that earnings quality was less than ideal”
RBC Capital, Joseph Spak
(underperform, PT $220 from $190)
- Third-quarter results were better than expected, but the stock reaction seems overdone and valuation is still stretched; the stock “seems to be discounting a lot of good already”
- While total and automotive revenue fell from a year earlier and sequentially, the auto gross margin ex. credits came in at 20.8% vs consensus of 18.3%; “no growth, but cost control -- sounds like an automaker”
JPMorgan, Ryan Brinkman
(underweight, PT up to $220 vs $200)
- While highlighting the magnitude of the beat in the quarter, JPMorgan says it’s “unsure that this is really the breakout quarter that is likely to be claimed by the bulls”
- 3Q gross margin beat at 20.8% vs JPMorgan estimate of 18.7% and consensus at 18.3%; says it’s not certain about the quality of this beat, while noting that a gross margin-driven beat suggests that Tesla is making progress on this front
--With assistance from Kit Rees and Sam Unsted.
To contact the reporters on this story: Chiara Remondini in Milan at cremondini@bloomberg.net;Esha Dey in New York at edey@bloomberg.net
To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, John Viljoen
©2019 Bloomberg L.P.