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Tesla’s Profit Streak Fails to Justify Its Rich Valuation

Published 10/23/2020, 09:17 AM
Updated 09/02/2020, 02:05 AM

Tesla (NASDAQ:TSLA) yesterday delivered what investors were expecting. The world’s most valuable car-maker reported a fifth consecutive quarter of profits, reaffirming that it remains on track to deliver half a million cars in 2020.

This strong performance is no joke in an environment where other car producers are struggling in the midst of a pandemic-driven global recession. The California-based electric car-maker reported Q3 profit of $0.767 a share on an adjusted basis, surpassing analysts’ consensus estimate for $0.55 a share.

CEO and founder Elon Musk described the last three-month period as “our best quarter in history.” The company saw production and delivery hitting records. Tesla also finished the quarter with $14.5 billion in cash on hand, its highest level ever, boosted by the $5-billion equity sale during the period.

Shares of Tesla were up about slightly on Thursday, closing at $425.79, adding to over its 400% rally this year.

Tesla 1-Year Chart.

The company needs to deliver more than 181,000 cars in the last three months of the year to hit its 500,000-vehicle target, which would be a 30% jump over the previous quarter.

“While achieving this goal has become more difficult, delivering half a million vehicles in 2020 remains our target,” the company said in a statement. This will largely depend on increased production at its Shanghai factory and higher output of its Model Y.

No Significant Surprise

But despite these promising results and future projections, many top analysts were not willing to revise their views on Tesla’s stock.

“Net-net, we don’t think the quarter changes the long-term terminal value debate much—when viewed in relation to the current stock price,” said Citi analyst Itay Michaeli in a note.

Tesla’s Q3 results were generally strong and slightly better than Street estimates, according to Bank of America. But “there was little in the way of a significant positive surprise that we believe bulls were hoping for.”

Tesla has earned just $0.50 a share over the past four quarters, so shares trade at more than 800 times trailing earnings. Its market value approaches $400 billion, or roughly five times the combined value of Ford (NYSE:F) and General Motors (NYSE:GM).

According to a Wall Street Journal analysis, Tesla profits are heavily flattered by sales of regulatory credits to help rivals meet emissions mandates. Tesla has booked $1.3 billion in such sales over the past four quarters, which carry a 100% profit margin. Total net income over that period is just $556 million.

“That profit source might not be available in the years to come as more electric competition from legacy auto makers comes online,” WSJ’s Charley Grant wrote in post earnings analysis.

Bottom Line

Tesla’s latest earnings report doesn’t change our view that the company’s recent showing is already factored into the stock valuations and its shares are substantially overvalued relative to the fundamentals.

With a lack of new catalysts, it’s prudent for investors to book some profit and wait on the sidelines for a better entry point. After a breathtaking rally this year, Tesla shares will remain susceptible to downward pressure, especially when many top analysts think that the current rally has run its course.

Latest comments

Ibviously , Musk wants to gather as many funds from all directions because his ONLY DIRECTION IS MARS ✌️❤️ Gotta get it while he can , money wont mean too much except more rockets headed his way xdActually a big deal. We dont spend enough on space rip
China has invited tesla as a call girl of China to abuse, steal and reverse engineer Tesla to destroy Tesla !! Tesla should have delivered readymade products and not “ Made in China” . I would prefer to have a plant in North korea than China.
Made in Asia, sold in Asia. Will lose in Asia in 2-3 years.
I am not customer yet but see more and more Tesla on streets of Taiwan.
I suppose Tesla should just book profit instead of aggresively spending capital ($2.4B in Q3) to meet their demand backlog which extends into 2023. Would that please dopes like this author?
People may not be able to realize TSLA is not a purely car manufacturer , just like Amazon was not a purely book seller. They have the similar characters in their early stages
What people fail to realize is that Tesla doesn't even measure up to traditional automakers because they are selling an expensive product in an emerging extremely niche market with global competitors who already have the manufacturing infrastructure in place that Tesla is about to pay billions for in the next couple of years, in a shrinking middle class, in the worst economic conditions since the Great Depression. Quit being a parrot and think for yourself
actually its quite the opposite existing car manufacturers sat on their hands and now are paying an arm and a leg for the technology and manufacturing capabilities TSLA already has. (GM and Ford buying up smaller entities)
So wrong. Tesla is far from Amazon. Its just a car maker operating in competetive market wereld market dominance is no real possibility
Spot on. Tesla cult members are like Biden supporters - they just don't get it.
And Trump supporters "get it?" Lol!
When I see comments like this when it comes to financials it makes me think that the poster is ignorant of a large part of what makes up the market. Additionally, cars is only a portion of what Tesla does. The author of this article made a blaring omission of this fact.
Tesla's AD system is not having edge , only level 2 stuff, some even classify it as assist driving tech only, plus its brand is eroding fast due to quality issues especially in Europe, the AI data Tesla collected is not in high quality, and NIO would be collecting much more data than Tesla due to the scale in China, and its data is much higher in quality, due to NIO uses more AI syystem and sensors systems. So many competitors catching up fast with better design and flexibility in offers, I find it harder and harder to invest any more money in Tesla, as I dont see the rosy story painted by Musk and Cathie Wood to be trusyable anymore. They never address my raised concern right head on! To me, it is more and more like a sc** day by day!
Lies. Tesla did have “autopilot” featire which was a minimal intervention system drivers could use on select roadways, such as highways. And level 5 full self driving beta was just released on Tuesday evening to select Tesla car owners.
Agreed. Hype
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