Yesterday Tesla (NASDAQ: TSLA) reported the results of its first profitable quarter since Q3 2016 and its third profitable quarter ever. The electric automaker said it earned $2.90 per share, well above Wall Street’s consensus estimate of a loss between $0.07 and $0.19 per share. TSLA brought in top line revenue of $6.82B and $311.5M in profits. We still expect degradation in Model 3 gross margins as the lower-specced $35K version enters production, but notably, Tesla’s cars are still highly desired by consumers and order deposits only decreased slightly to $906M.
Shares of TSLA opened at $317.38 this morning, 10% higher than Wednesday’s close, and settled around $310 by press time.
CEO Elon Musk offered positive guidance, calling for sustainable profitability going forward. If Tesla can keep generating cash ($881M in FCF this quarter), the company’s current debt load starts looking manageable ($230M in SolarCity convertible bonds due next quarter). In our view, Q3 2018 was Tesla’s best quarter in its 15 year history: the company managed to build cars at scale, control costs (redesigning production and laying off 9% of its workforce), and achieve meaningful profits. On a revenue basis, Tesla’s Model 3 is now the best-selling car in the United States.
“I feel like the demand curve is even stronger than it was three or six months ago,” equities analyst Jamie Albertine of Consumer Edge told Bloomberg News. Still, “nothing’s in the past” in terms of scale and cash flow issues, Albertine cautioned.
Other analysts were harder to convince. Goldman Sachs’ David Tamberrino maintained his ‘sell’ rating even as he raised TSLA’s target price to $225 from $200.
“We question if this is not as good as it gets from a near-term upside surprise for shares,” Tamberrino wrote. “The company has maintained that it designed and built the Model 3 with a target 25% gross margin and almost achieved that this quarter (albeit with a rich mix). However, with its own exposure to China tariffs on imported components and likely headwinds to mix as lower price point vehicles are offered, automotive gross margins likely compress sequentially into 4Q18 – and could see further mix pressure into 2019 as the US Federal Tax Credit begins to phase out for its vehicles.”
John Murphy at Bank of America Merrill Lynch also thought this quarter may be as good as it gets for Tesla.
“3Q:18 possibly the best quarter TSLA may see in a while,” Murphy wrote. “Many of these elements, particularly mix, are peaky in nature, and will likely fade in the future, so the burden of proof remains on TSLA to generate core underlying earnings and cash flow absent peak factors.”
Tesla’s sequentially lower capex was part of the story this quarter, and we question whether the company will be able to break out of its current run rate of ~4,400 Model 3s per week without substantial additional investment. According to Bloomberg’s Model 3 Tracker, production has been essentially flat for a month.
Wall Street still largely thinks the stock is overpriced. Now that we don’t have to divide by negative numbers, we can start talking about Tesla’s price/earnings ratio. Based on yesterday’s earnings results and today’s price, TSLA is trading at a +40x P/E ratio, while Ford Motor Company (NYSE: F) is at 5.22x and General Motors (NYSE: GM) is at a similar 5.17x ratio. Yes, Tesla is a growth company, but in our view the valuation is irrational.
To give credit where credit is due, we congratulate Tesla on an outstanding quarter. In the end, tweets, executive departures, and AutoPilot issues did not matter—what mattered was the gritty determination of Elon Musk and his team to make undeniable improvements to assembly and delivery processes.