Tesla Stock Is Ready to Break Out After Quarterly Profits Surprise

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Tesla’s (NASDAQ:TSLA) latest quarterly earnings report added to the usual volatility on the stock. And even though the stock is soaring following its earnings beat, investors should take a long-term view on its prospects. There are two key developments to focus on. First, the company will start manufacturing Model 3s in China. And second, its record deliveries in the third quarter suggest renewed momentum in the business.

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On Oct. 17, China gave Tesla the green light to build a $2 billion factory in the nation. It will build at least 1,000 Tesla Model 3s weekly starting in just a few weeks. Tesla also gains access to the Chinese market. Although it will compete with Nio (NYSE:NIO), Tesla no longer has import tariffs to worry about. That will give it more flexibility in adjusting its pricing as needed to spur demand.

China’s willingness to bring Gigafactory 3 online signals the country’s desire to open up its electric vehicle market. China is letting in a company that is a premium brand with an established record of innovation in EV batteries, autonomous driving and EV range. From a supply aspect, Tesla gets lower labor, electricity and raw material costs. And just as Apple (NASDAQ:AAPL) expanded in China to offset the slowing sales in North America, Tesla is doing the same.

Record Third-Quarter Deliveries

On Oct. 2, Tesla posted record production of 96,155 vehicles. It delivered a record of just under 97,000 vehicles. The Model 3 is clearly a market share booster for Tesla, while the company also achieved strong deliveries for the S and X models.

Third-Quarter Profits

After the market closed on Oct. 23, Tesla reported third-quarter revenue of $6.3 billion. But the big surprise that will have shorts (with a 26.7% short float) scurrying is its profits. Adjusted earnings per share came in at $1.86. At an adjusted EBITDA of $876 million, this is well above the $646 million consensus estimate. EBITDA margin rose to 13.9%, up sharply from 5.8% in Q2. GAAP net income was $143 million. Tesla ended the third quarter with a $383 million increase in cash and cash equivalents. It now has a balance of $5.3 billion.

In its shareholder letter, the company reminded investors that the Model 3 is expected “to truly propel electric vehicles into the mainstream.” And the company is not just an EV company — but one that offers a full suite of energy products. With its Gigafactory online and with the acquisition of SolarCity, Tesla offers solar, storage and grid services.

Operationally, Tesla increased the production of Model 3 by 50% year-over-year, offsetting the 39% decline in Model S/X production. Plus, supercharger stations grew 22% year-over-year while supercharger connectors grew 32%. The improved infrastructure will improve the appeal for Tesla vehicles over its competitors.

Geographic Diversity

The company is already producing vehicles at its Gigafactory Shanghai location. Once it receives government approval and has a manufacturing license, it will start ramping up production and delivery from Shanghai. In Europe, Tesla is in the final stages of site selection. When that site selection is complete, its European Gigafactory will produce both the Model 3 and Model Y.

My Takeaway on TSLA

After the big earnings beat, analysts will have to reverse their “sell” calls on TSLA stock. The average price target is below $258, suggesting the stock is headed lower. But after the stock rose 20% in after-hours trading to $305.88, analysts will need to quickly align their price targets to the market price.

Tesla stock is still over 30% below its 52-week high, based on a recent closing price of $254.68. The strong Q3 earnings report reverses all the bearish sentiment and may send the stock in a sustained uptrend.

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

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/tesla-stock-is-ready-to-break-out-after-quarterly-profits-surprise/.

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