Tesla Post-earnings Analysis: What you Need to Know

By Kirsteen Mackay


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Is Tesla a good investment? The debate rumbles on. Inflation, S&P endorsement, FSD, insurance, bitcoin, supply chain hurdles, Hertz orders, and more inside.

No stock polarises bulls and bears like Tesla (NASDAQ: TSLA). But yet again, the electric car manufacturer has beaten estimates and impressed shareholders with better-than-expected earnings, record deliveries and impressive margins.

Tesla's Q3 earnings results pleased analysts, but the stock is already very highly valued, so it has only gained around 5% since the latest earnings call. Nevertheless, this is once again a record high for the TSLA share price.

  • Earnings per share (EPS adjusted): $1.86 vs. $1.59 expected

  • Revenues: $13.76 billion vs $13.63 billion expected

  • Net income (GAAP): $1.62 billion (the second time it has surpassed $1 billion)

The most bullish aspect of its latest results is its widening gross margins, which are now closing in on 30%. That's three times better than General Motors Company (NYSE: GM) and five times better than Ford Motor Company (NYSE: F).

Sales were up 70% year-over-year and 20% higher than Q2.

Tesla is sitting on a whopping $16 billion of cash and is on track to hit an annualized production run rate of over one million cars. This is mainly in thanks to ramping up production of its Model Y in Shanghai.

Is Tesla affected by supply chain issues?

For Tesla, scaling vehicle production and timing its product launches depends on increasing cell capacity. Tesla runs an in-house battery manufacturing program and purchases others from suppliers, so like all manufacturing companies is subjected to various headwinds in the supply chain.

However, it appears to be less affected by supply chain issues than its competitors because it has at least some control over its chips. Transitioning the Shanghai factory to be its main export hub will significantly help it in this regard. According to the latest earnings call, the Shanghai facility has boosted supply to North America and Europe.

Nevertheless, part shortages and unpredictable logistics mean the factories are not being run at full capacity.

While the company has doubled deliveries year-to-date, it emphasized this has been exceptionally difficult to achieve. Therefore, further supply chain obstruction or Covid-19 lockdowns could throw a spanner in the works.

Indeed, backlogs are continuing to grow, and average customer wait times are growing.

Inflation is also a worry for many investors, and Tesla is already increasing prices along with production.

Where are all the Tesla factories?

Whereas traditional carmakers are retrofitting their factories to produce EVs, Tesla is building brand new factories. This gives it an advantage in that it can optimize for efficiency from the ground up.

Tesla factories today:

  • Tesla's original factory is located in Fremont, California.

  • Tesla Gigafactory 1 in Nevada.

  • Gigafactory 2 in Buffalo, New York.

  • Gigafactory 3 in Shanghai, China. This is now Tesla's central export hub.

  • Gigafactory in Berlin.

  • Giga Texas in Austin.

Of course, owning physical factories comes with vast operational costs. Staffing, kitting out and running each factory is expensive. However, its Fremont and Shanghai factories are already up and running, generating stable and growing margins. So, the optimistic view is that margins can realistically continue to grow.

Zachary Kirkhorn, Master of Coin & Chief Financial Officer, Tesla, Inc, stated:

"It remains our target in both Austin and Berlin to be able to build our first production cars before the end of the year… We should not expect for us to deliver cars by the end of 2021 from these factories, even if we do produce them."

Kirkhorn also noted it's difficult to predict how ramping factories and vehicle production will affect future margins:

"It's just entirely dependent on how quickly we're able to ramp and what uncertainties come up during the process."

Will Full Self-Driving (FSD) boost the Tesla share price?

Tesla has really been pushing its full self-driving (FSD) narrative for some time now and noted it's excited to have expanded the FSD beta program to more customers.

Unfortunately, on October 24, Reuters broke the news Tesla has had to roll back the latest version of its FSD beta software less than a day after its release after users complained of false collision warnings and other issues.

Tesla does not yet recognize additional revenue from the FSD beta program. If and when it can pull off FSD without concern and begin adding payments, then it's sure to give the TSLA share price a welcome boost. Until then, investors have to consider the fundamentals.

How much does Tesla make on energy storage?

Tesla is also working on expanding its Powerwall and Megapack production program as quickly as parts and cells allow it to do so. This quarter, the company earned $806 million from its energy division (solar and energy storage), but costs rose to $803 million.

Is Tesla making money from Bitcoin?

Tesla recorded a $51 million impairment related to its investment in bitcoin, which is reported under "restructuring and other" expenses.

Does Tesla offer insurance?

Tesla is also working with the insurance market to develop a fairer way to provide insurance to its drivers. It sees this as a long-term project that could be leveraged to increase profits while making the cars more affordable to safe drivers. This is a highly regulated industry, so it will take time for this product to be developed.

Does inflation affect Tesla?

“A variety of challenges, including semiconductor shortages, congestion at ports and rolling blackouts, have been impacting our ability to keep factories running at full speed.”

Uncertainty surrounding supply chain difficulties and production barriers continues to present headwinds. And rising commodity and labor costs match the rising inflation narrative concerning investors worldwide. This is undoubtedly something TSLA shareholders have to keep in mind.

This is particularly prevalent in nickel and aluminum. Nickel for the cell batteries and aluminum in non-cell. While Tesla has some security in long-term contracts, it also sources some materials directly and, therefore, directly experiences price fluctuations.

Tesla is moving all of its standard range vehicles to Lithium Iron Phosphate (LFP) battery chemistry globally. This will replace lithium-ion battery cells. LFP batteries should be more affordable to produce as iron is abundantly available. Tesla sources these LFP batteries from CATL in China.

Why S&P approval matters to Tesla

Tesla released its Q3 results at its earnings call on October 20. Two days later, the S&P upgraded Tesla's long-term credit rating to BB+. This is a great endorsement emboldening positive sentiment.

The S&P 500 index is a highly-regarded benchmark for large US stocks. It is potentially the most crucial stock-market gauge globally.

Tesla being admitted to the S&P 500 index last year was a controversial decision that angered many long-term investors and money managers. Fund managers are judged on their performance against the S&P 500 index, which incentivizes them to pick stocks wisely.

So, when Tesla was admitted to the S&P 500, many money managers felt obliged to buy Tesla to avoid contradicting the index. Indeed, the hype surrounding its potential entry to the index worked wonders at raising its share price.

But in the six months after joining the prestigious index, the TSLA share price tanked. Meanwhile, the stock it replaced, Apartment Investment and Management (AIV), rallied 48%.

Since June, Tesla has rebounded, and year-to-date TSLA stock is up 26%, and AIV stock is up 35%. It's swings and roundabouts, and as long as Tesla continues to beat analyst expectations, shareholders will be happy.

Is Tesla stock a buy?

The EV company continues to have lofty production goals and never fails to impress and surprise investors.

Zachary Kirkhorn, Master of Coin & CFO, said:

"So, our goal is to get to millions of cars per year over the next couple of years, and then ultimately in the long term, be able to achieve 20mm cars per year. We’re going to grow as quickly as is feasibly possibly with an eye towards a 50% annual growth rate."

Elon Musk's star performer is executing accelerating expansion plans globally for its supercharger network with plans to triple it over the next two years.

According to a recent Bloomberg scoop, car rental company Hertz Global Holdings Inc (OTCMKTS: HTZZ) has just ordered 100,000 Tesla EVs for its fleet. With Hertz having only recently emerged from bankruptcy, this is quite the ambitious turnaround story. It’s also given the Tesla share price an unexpected bump as the order is reportedly worth over $4 billion.

The debate on whether Tesla is a good investment rumbles on, and ultimately time will tell.

There's no doubt it has many fans and continues to prove doubters wrong time and again. But its fundamental financials are unlike any traditional car company, and some of its projections seem too far-fetched to be believed. Furthermore, much of the hype that has taken the TSLA share price this far is undoubtedly based on the public perception and faith in Elon Musk.


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Author: Kirsteen Mackay

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Kirsteen Mackay does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Kirsteen Mackay has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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