Tesla Inc TSLA exceeded fourth-quarter earnings expectations with a $2.14 adjusted bottom line and $7.38 billion in revenue. Management closed the quarter with $6.3 billion in cash and $1 billion in free cash flow — $1.1 billion better than Morgan Stanley’s $100 million burn estimate.
“This quarter may be seen as the moment a new genre of tech investors were waiting to perceive Tesla through a new narrative: as a profitable and cash generative tech company with a reasonably-sized market cap in the same discussion as the megatech ‘platform’ names,” Morgan Stanley analyst Adam Jonas wrote in a report.
As previously promised, Tesla achieved positive GAAP net income and quarterly free cash flow. The cash-flow conversion was particularly lauded.
“Stepping back, one could argue the company is comfortably clipping >20% clean auto gross margins and a 5% OP margin BEFORE utilizing a plant (China Giga) that is likely far lower cost and more efficient than Fremont,” Jonas wrote.
Auto gross margins contracted slightly, while operating margins expanded to 4.9%. Canaccord Genuity expects gross margins to improve once Tesla begins to deliver Model 3s in China.
“Essentially flat gross margins compared to the prior quarter were a meaningful feat given the ramp associated with Gigafactory Shanghai moving to begin production,” analyst Jed Dorsheimer wrote in a note.
Big Picture Implications
Canaccord Genuity expects the results to “finally put to rest any balance sheet concerns.”
“The benefits from the company’s initiatives in improved margins and cost structure continue to bear fruit, resulting in strong earnings,” Dorsheimer wrote.
Morgan Stanley suggested the earnings could change Tesla’s narrative.
“The quality of the earnings and $6.3 billion of gross cash position may be seen as lowering the odds of new supply of stock or putting the company in position to access capital from a position of strength,” Jonas wrote.
Still, Bank of America wasn’t particularly encouraged.
“While bulls on TSLA view the two most recent quarters (3Q:19 and 4Q:19) as indication that the company has effectively transformed profits and free cash flow, we remain skeptical that TSLA has completely turned the corner, and rather believe that growth may be accompanied by additional income and cash flow volatility,” analyst John Murphy wrote.
Bank of America suspects that the earnings outperformance is already reflected in the stock price, but Canaccord sees only upward movement.
“Given the numerous positive data points that were discussed and the cornerstone of continued profitability and FCF generation, we view the company as solidly positioned as the leader of the EV revolution,” Dorsheimer wrote.
Morgan Stanley noted Tesla’s potential to strike its $650 bull-case target, and Loup Ventures expressed similar optimism.
“Given the progress over the past year along with the size of the opportunity, all indications point to Tesla’s stock taking a similar path to Amazon’s over the past decade, with valuation continuing to move higher,” managing partner Gene Munster wrote. “The key question remains: how much is a foundational company in the future of transportation worth? We think more than the current $110B.”
Not all shared the enthusiasm.
“We continue to see significant risks related to the China factory ramp-up, as well as rising EV competition from automakers still eligible for the full federal tax credit in the U.S.,” CFRA analyst Garrett Nelson wrote. “TSLA also did not provide detail regarding capex related to its new factory in Germany.”
Bank of America maintained an Underperform rating but raised its price target from $350 to $370;
Canaccord Genuity maintained a Buy rating but raised its target from $515 to $750;
CFRA maintained a Sell but raised its target from $400 to $440; and
Morgan Stanley maintained an Underweight rating and $360 target.
Tesla's stock traded higher by 11.3% to $647 per share at time of publication.
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