Results Are Why Highly-Valued Tesla Will Move Higher
Tesla (NASDAQ: TSLA) reported a mixed quarter but the shares are moving higher anyway. The shares are moving higher because, although mixed, the margin came in well above the consensus estimate despite headwinds that cut into both the top line and margins. Those headwinds are centered in the Covid-related lockdowns in China and they are diminishing, a factor noted by several analysts following the report, and that means a high potential for outperformance in the back half of the year.
“The more cars that rattle through Tesla’s enormous gigafactories the lower the per-unit costs, so the disappointing delivery numbers released earlier this month meant investors had already braced themselves for a step down in profitability,” wrote Hargreaves Landsdown analyst Laura Hoy in her note to clients. “On the bright side, this should be a short-term problem. As we saw in the first quarter, fully functioning factories send dollars straight to the bottom line. Once supply chain bottlenecks ease and the factories are humming along at full capacity, margins will get a boost.”
Tesla Proves Resilient In Tough Times
Tesla had a good quarter despite the shut-downs in Shanghai that affected production throughout the quarter. The company reported $16.93 billion in net revenue for a gain of 41.6% over last year. The gain was driven by pricing increases and volume but in line with the analyst's estimates, a fact mitigated by ramping production in Shanghai and the new Gigafactories in Berlin and Austin. The only bad news is the company reported a slight dip in deliveries but that too is mitigated by the Shanghai shutdowns. The net result of orders and deliveries is a growing backlog that shows no sign of shrinking.
“We continued to make significant progress across the business during the second quarter of 2022. Though we faced certain challenges, including limited production and shutdowns in Shanghai for the majority of the quarter, we achieved an operating margin among the highest in the industry of 14.6%, positive free cash flow of $621M and ended the quarter with the highest vehicle production month in our history,” said Tesla in the earnings report.
In regard to the margin and earnings, the automotive margin fell 50 basis points YOY and 500 basis points sequentially to 27.9% but well above the consensus. This left the adjusted earnings at $2.27 which is $0.47 above the Marketbeat.com consensus. The takeaway here is the company is proving its earnings power despite the impacts of inflation and these results improve as production ramps.
The Analysts Are Driving Tesla Higher
The analyst activity in Tesla remains mixed but the sentiment is firming and the price target stabilizing. The Marketbeat.com consensus rating is still a Hold but that is a very firm Hold verging on Buy and up in the last quarter due to some upgrades. The consensus price target is down from its peak and assumes the stock is fairly valued at current levels but we think the bottom is in as far as it goes. There have been eight shout-outs so far including 6 price target upgrades and 2 downgrades that are both above the consensus.
Turning to the charts, the wave of positive commentaries that came out after the earnings release has the stock moving higher. The price action in Tesla is up more than 6.0% and trying to break out to a new high. The break-out, if and when it comes, could easily lead the stock up to the $960 level and our target for stiff resistance.
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