Tesla Has Finally Found Its Way To Profitability, Crushing Wall Street Estimates

Tesla Has Finally Found Its Way To Profitability, Crushing Wall Street Estimates

Tesla Inc TSLA stock has been on a roll since late August, going up nearly 20%. And now it published its most important earnings results yet, with shares spiking as much as 17% after hours, reaching the highest price since February.

Surprise Profit!

Everyone knows that this is a company with a market capitalization of $47 billion, and an enterprise value over $50 billion. But those valuations suggest the company will create billions in profits, not just sales and that's where the company had massive issues. Well, Musk finally made it during its third quarter, as by excluding certain items, Tesla reported earnings of $1.86 per share and this is far more than the 42 cent loss per share that Wall Street saw coming. Revenue came in at $6.30 billion, just shy of the $6.33 billion analysts had expected but then again, Tesla estimates have historically been exceptionally wrong. So, profits are finally in for the car maker that is driving the Electric Vehicle revolution! And this is the first profit since the last quarter of 2018.

Earnings Report

With revenues of $6.3 billion, Tesla generated a net income of $143 million. Sales are down slightly from the previous quarter, but also from the third quarter of 2018, with the company attributing the first year-over-year quarterly revenue decline since 2012 to the fact that the number of leasing customers tripled since they started this chapter with their Model 3 in April. So how did they make a profitable quarter? By slashing operating costs, which are at the lowest level since the production of this model started, helped by workforce cuts and the regulatory credits of $134 million.

Past Tesla earnings reports haven't necessarily focused on the bottom line but on deliveries, with investors debating whether demand for the Model 3 would be sufficient to drive the growth that is bound to happen from the company's valuation. But in Wednesday's report, profitability was finally the center of attention. However, not even a loss in Q3 wouldn't be the end for Tesla stock due to potential for growth with its new factory in China. Wall Street has seen profitability coming eventually, analysts were just sceptic for this quarter.

Concerns

Tesla needs to convince the market that it can make real, consistent profit selling the Model 3 which is its main revenue catalyst, with tax credits for its buyers diminishing. Due to a slow start of 2019, Tesla has to pull off an even more impressive fourth quarter just to hit the low end of what Elon Musk estimates for the year that involve the company shipping at least 360,000 vehicles. Still, Tesla managed to make a profit for the first time since ending 2018 with back-to-back profitable quarters, finally making Musk's predictions come true.

Shanghai Factory

Tesla's Gigafactory 3 is the Joker for Musk's vision to become reality as it is going to change the game for the electric vehicle pioneer. US automakers are going to be subject to a 50% import tax whereas Tesla will be shielded from this burden. The factory will also give the company direct access to the largest electric vehicle market in the world. It is expected to start production this quarter, something that is not so common for Tesla.  Despite a recent drop of the economy, there are still plenty of opportunities for Tesla. Even with the sagging economy, Tesla will be able to sell more cars, period. But it didn't come easy, Musk spent years lobbying but the new factory seems to be well ahead of schedule already.

Competitors

BMW BMWYY CEO is showing a strangely dismissive nature about Tesla and other upcoming rivals from its new CEO. It is a bit strange despite the company's history and strong legacy, considering that rivals offer more tech, range at a more reasonable cost when it comes to the electric market. Then there's Volkswagen's VWAGY electric ID3 that was recently revealed for Europe, taking passive safety further with a center airbag between the driver and the front passenger. But the automotive industry overall is struggling as even shares of Ford Motor Company F dropped almost 4% after the company posted a somewhat mixture in its third quarter earnings forcing it to cut its full year outlook and posted mixed earnings for its third quarter. And everyone expected further headwinds from China reflected in lower volumes and increased costs due to tariffs.

Outlook

Tesla still enjoys strong demand which is a good sign of the demand side. They just need to manage their costs and ensure their production runs smoothly, in other words, learn how to be profitable long-term. Optimists see Tesla as a bet on a brighter future being a company that will dominate the fast-growing electric vehicle space for years to come. On the other hand, pessimist point out to broken promises, and a valuation that fails to incorporate the realities of the difficult, low-margin, capital-intensive automotive manufacturing business. All investors' eyes are now on seeing how much of a bust will the almost-ready Chinese factory make to Tesla's bottom line. Things may be finally looking up for the EV pioneer!

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