Can Tesla Stock Reward Investors?

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When Tesla (NASDAQ:TSLA)  released worse-than-expected Q2 2019 earnings on July 24, many investors possibly ended up with more questions than answers on what to expect from Tesla stock for the rest of the year.

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Before the earnings, TSLA  stock closed at $264.88. The next morning it opened at $234.50. Now Tesla stock price is hovering around $239. Can TSLA build up investors’ confidence enough in the coming months to push the stock over $300? Let’s take a detailed look.

TSLA’s Q2 Earnings

In Q2, Tesla’s total revenue came in at $6.35 billion, a year-over-year increase of 59% . However, the company missed analysts’ average top-line estimate of $$6.41 billion.

During the quarter, Tesla delivered 95,200 vehicles. The 134% YoY increase in vehicle deliveries was the main driver behind its revenue growth.

Despite the revenue increase, TSLA lost $408 million, or $2.31 per share. Even though Tesla did not lose as much money in Q2 as it did in Q1, it still lost more than analysts’ consensus estimate.

Finally, TSLA said it still expects to deliver between 360,000 and 400,000 vehicles in 2019. However, in the first half of the year, Tesla delivered just 158,375 vehicles. Can the company’s  deliveries in Q3 and Q4 combine to reach even the lower end of its guidance range?

In Q3 and Q4 of 2018, Tesla delivered 83,500 and 90,700 vehicles respectively. If the company’s performance in the rest of 2019 is similar, then TSLA will not even deliver 360,000 vehicles in the second half of 2019. In such a potentially disappointing scenario, how would TSLA stock price react?

Tesla Stock and Decreasing Automotive Margins

Tesla’s Q2 results showed that the gross margin of its automotive segment is declining. Last quarter, it was 20.2%. In Q4 and Q3 of 2018, the metric was 24.3% and 25.8%, respectively.

At present, TSLA has three models on the roads in the U.S. and globally:

  • Model S (its most expensive model which it has produced since 2012)
  • Model X (its mid-size crossover SUV which it has produced since 2015)
  • Model 3 (its cheapest model, which it has produced since 2017)

In Q2, Tesla reduced the prices of older versions of Model S and Model X. In Q2, S and X deliveries declined by 21% YoY.

The main reason behind the decline of the company’s  gross margin is that Tesla’s sales mix is increasingly shifting from higher-priced S and X models to the Model 3.  Model 3, which is priced at $35,000 is an entry-level car that carries lower margins.

As in Q1, demand for the company’s  more expensive models fell last quarter. Analysts are not exactly convinced that Model 3 is profitable.  Can Tesla continue to cut the prices of its profitable models and rely mostly on the Model 3 to drive its growth?

Tesla Needs to Sell Vehicles in China

In late 2017, Tesla and the Chinese government agreed that the company  would manufacture cars in China., and build and own a factory in Shanghai.

With a population of 1.4 billion, China has a major pollution problem in its big cities. China wants to lead the world in electric vehicles in an effort to make its environment cleaner.

Tax incentives, various fee exemptions, and other subsidies granted by the Chinese government have been fueling the recent growth of its EV market. As of September 2018, China had 403 million drivers and 322 million motor vehicles in total, including 235 million cars.  It is expected that by 2025, 50% of all vehicles in China will be  EVs.

TSLA is continuing to build its manufacturing plant in Shanghai. However, the details as to when actual production will begin at the plant is sketchy. Tesla is yet to release definite dates and  production goals for the plant. Also, TSLA cut its full-year capital expenditure guidance.

Now the owners of TSLA stock are understandably nervous as to how it will be possible for the company to complete the factory in China while spending less cash than previously expected.

TSLA Stock and Leadership

During its Q2 earnings release, TSLA reported that its longtime Chief Technology Officer, JB Straubel. is stepping down from that role and will become a senior advisor, a role which was not defined in detail.

Straubel saidI just want to make sure that people understand that this was not some lack of confidence in the company or the team or anything like that,” many investors probably wondered whether to take his words at face value.

In the coming months, if there are further unexpected developments regarding Tesla’s  leadership, the owners of TSLA stock may end up throwing in the towel in frustration until the company’s management team stabilizes.

The Bottom Line on Tesla Stock

Given the volatility of  Tesla stock over the past year due to the ongoing question marks about Tesla’s fundamentals, I would urge long-term investors to be cautious about Tesla stock.

On June 3, TSLA stock reached a 52-week low of $176.99. If you are one of the investors who bought Tesla stock, you may want to consider taking some of your paper profits.

Or within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 5%-6% below the current price of TSLA stock.

The two important points to remember are that the trend is an investor’s friend and that Tesla is a volatile stock.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

Tezcan Gecgil, PhD, began contributing to InvestorPlace in 2018. She brings over 20 years of experience in the U.S. and U.K. and has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Publicly, she has contributed to investing.com and the U.K. website of The Motley Fool.


Article printed from InvestorPlace Media, https://investorplace.com/2019/08/can-tesla-stock-reward-investors/.

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