Shares of Tesla (NASDAQ:TSLA) caught fire in late October after the electric-vehicle maker reported strong third-quarter numbers which included a surprise profit.
Everything went right for Tesla in Q3. Its deliveries were up versus Q2 and year-over-year. Its outlook in China and Europe gained momentum. Its gross margins improved. Its operating expense rate fell to multi-year lows. TSLA reiterated its strong full-year guidance, which calls for most of these positive developments to persist next quarter, too.
In response to the across-the-board upbeat results, TSLA stock soared more than 30% to its highest levels since January 2019.
Tesla stock has given back some of those gains in recent trading days. All together, TSLA stock presently trades roughly 5% off its post-earnings highs. Because of this slight pullback, some investors are saying that the post-earnings surge of TSLA stock was a temporary short-squeeze rally, and that Tesla stock will trend lower going forward.
But that isn’t what’s happening. Instead, some investors who bought TSLA on weakness aggressively earlier this year are naturally taking profits. This profit-taking will end soon, mostly because Tesla’s growth outlook is firing on all cylinders, bulls are in control, and the company’s long-term fundamentals indicate that the shares are fairly valued around $300.
Investors should let Tesla stock cool down some after its red-hot, post-earnings surge. If the shares drop below the $300 level, buy Tesla stock on weakness, and hold it for the long-haul. In the long run,TSLA will go way higher.
Tesla’s Earnings Were a Home Run
There have been a lot of murmurs from TSLA bears that Tesla’s huge Q3 earnings beat wasn’t as good as the headline numbers made them out to be. But, make no mistake, Tesla’s Q3 earnings report was a home run.
The big news from the results was that Tesla reported a surprise, sizable profit of $1.91 per share. The company was supposed to report a loss, according to Wall Street analysts’ average estimate.
That huge earnings beat is largely why TSLA stock soared 30% over the subsequent few trading days. But bears pounded on the table that the profit beat was entirely a byproduct of one-time accounting adjustments that won’t persist, and that the underlying trends aren’t as good as they seem.
That couldn’t be farther from the truth. From top to bottom, Tesla’s numbers were strong. Consider the following:
- Delivery volumes surged. The company’s total deliveries rose 16% YoY and 2% versus Q2 to record levels, paced by the all-important Model 3’s 40%-plus growth. The company’s guidance calls for deliveries to rise by 15% YoY in Q4, too. And CEO Elon Musk hinted on the earnings call that the Model Y — due to launch in 2020 — will outsell all other Tesla models combined. If that proves to be accurate, TSLA’s delivery volumes will continue to jump for the next several years.
- Gross margins improved. In Q3, TSLA’s total gross margins improved 4.39 percentage points versus Q2, while its automotive gross margins climbed 3.93 percentage points.
Sure, there were some one-time, non-recurring adjustments that helped boost its margins. But, excluding those adjustments, the average selling prices of the Model S and Model X improved versus Q2, while the company’s production costs did come down. Thus, while the company’s “true” gross margins rose less than four percentage points, they did improve. That improvement in and of itself shows that this company is on a steady gross margin improvement track.
- Expense rates dropped. In the quarter, operating expenses dropped to their lowest level since Model 3 production started. That led to a 1.4 percentage point YoY drop in the Q3 expense rate, contributing to the seven percentage points of improvement in Tesla’s operating profit margin.
Most of the expense decline was driven by disciplined cost controls. Continued effective cost controls should enable TSLA to drive its expense rate down to 10% as it grows.
Tesla’s strong Q3 earnings confirm that the outlook of the company’s revenue growth and margin expansion remains alive and well.
Tesla Stock Deserves a Price Tag Above $300
Tesla stock deserves to trade above $300.
TSLA is the face of the electric-vehicle revolution, which is sweeping across the world. Sure, there are tons of competitors in the sector. Over the next few years, more competitors will enter the space.
But this competition hasn’t derailed Tesla’s growth outlook at all, nor will it anytime soon, because Tesla continues to produce cheaper, better, and more desirable EVs than its peers. Put simply, TSLA is ahead of the competition in terms of production volume, innovation, and “coolness.”
As a result, as EVs continue to take over the global auto landscape, Tesla will be at the forefront of this disruption, selling more and more cars at favorable price points. That, in turn, will lead to huge revenue growth over the next several years, with respectable gross margins. The company’s expense rates should drop as it grows, especially since Tesla doesn’t spend any money on advertising.
Overall, TSLA looks well-positioned to generate high revenue growth for a long time, with sizable positive margin catalysts. Consequently, the company’s profits should grow rapidly.
My numbers indicate that Tesla’s earnings per share can reach $50 by 2030. Assuming the forward earnings multiple of Tesla stock at that point is 16, which is the market’s average, then a reasonable 2029 price target for TSLA stock is $800. Discounted back by 10% per year, that equates to a 2019 price target for TSLA stock of just under $310.
The Bottom Line on TSLA Stock
The company’s strong delivery and profit numbers confirm that TSLA stock will be a long-term winner. Over the next decade, Tesla stock will head towards $800.
A lot of those gains are already priced into the shares today. As a result, I wouldn’t buy the shares above $310. But if the stock continues to cool off and pulls back below $300, that dip would be a buying opportunity.
As of this writing, Luke Lango was long TSLA.