Electric vehicle icon Tesla Motors Inc (NASDAQ:TSLA) just reported third-quarter earnings that shocked the world. The surprise? The beleaguered carmaker turned a profit. TSLA stock analysts were calling for another loss, certain that no amount of plausible scale-up would actually carry the company into the black.
They were wrong.
Tesla earned 14 cents per share, versus expectations for a loss of 53 cents per share of Tesla stock.
More important (perhaps most important of all) is the fact that the amount of gross profit produced per car was vastly expanded. This validates the idea that Tesla Motors simply needed more scale to become viable.
If CEO Elon Musk can simply keep his company on its present trajectory — and profitable — TSLA stock may well have a moment like the one Amazon.com, Inc. (NASDAQ:AMZN) shares created for investors back in early 2015. That’s when its Amazon Web Services (AWS) division got big enough that the e-commerce giant began reporting its numbers separately, and surprise! AWS is the bulk of the reason Amazon earnings per share have been significantly better since the latter part of last year.
AMZN shares are up 166% since the end of 2014, when the writing on the wall started to appear regarding the potential of AWS.
Amazon Over the Hump
OK, it’s not an apples-to-apples comparison, but it’s not an apples-to-oranges comparison, either. Maybe it would be best described as red apples to yellow apples.
Amazon added a new service that’s proven quite profitable, while Tesla simply did more of what it’s already been doing.
The parallels are still clear, however, as is the potential response from TSLA stock. That is, once traders have a reasonable basis to think Tesla Motors is self-sustaining, it becomes immensely easier to justify an investment.
Just for a little perspective: In the second quarter of this year, Amazon Web Services turned $2.8 billion worth of revenue into operating income of $718 million. That’s more operating income than was produced by its e-commerce operation in North America for the previously reported quarter; its operating bottom line was only $702 million.
That wasn’t an unusual quarter, either. Indeed, Q2’s near-doubling of year-over-year revenue and more-than-doubling of operating income extends what has become a long string of profitable growth for the division — a trend that started to make a big difference for the corporate bottom line beginning in the middle of 2015 (and a small difference as far back as late-2014). It’s more than half of Amazon’s operating income for the quarter, and almost as much as the net income of $857 million it produced in Q2.
Granted, Amazon is still pitifully profitable, clearing next to nothing in terms of net profit margins. It doesn’t matter. AMZN shareholders only needed to see the company not bleeding cash to turn up the buying heat.
Now It’s Tesla’s Turn
Tesla Motors might be getting to consistent profitability by taking a different path, but it’s getting to the same place all the same if last quarter’s numbers are the shape of things to come.
While we broadly know TSLA is doing better than it has in the past, details are still a little fuzzy. But there’s no denying that greater size has been a good thing, whittling down its total costs per car made. Gross profits as a percentage of revenue rolled in at 27.7%, versus only 24.7% for the same quarter a year earlier, and only 21.6% in Q2 this year. From a different angle, total operating expenses were up by only by 32.7% YoY last quarter. Revenue was up 145%.
An accounting change put into place as of the quarterly report may beef up the top line in a manner it hasn’t been able to before. The organic growth and expense control Musk has mustered, however, more than offsets any benefit that change may drive.
In other words, Tesla might not be as profitable as it would like to be. But like Amazon, Tesla has proven it can turn a profit. From here, it’s just about enhancing the numbers.
That’s good enough for a story like TSLA stock.
Bottom Line for TSLA Stock
While Tesla may have just joined Amazon in the ranks of consumer-tech companies that have fought their way out of the red, don’t think for a second owning Tesla stock will be a cakewalk. AMZN has continued to dish out thrills and chills in the meantime, pulling back as much as 29% between late-2015 and February of this year.
Still, it’s been worth the stomach-turning swings. Again, AMZN shares are up by triple-digits in less than two years.
Like Amazon, TSLA stock still isn’t a great for grandma’s retirement portfolio. But the company just got a huge monkey off of its back.
Let’s just hope an acquisition of SolarCity Corp (NASDAQ:SCTY) doesn’t let another monkey jump right back on.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.