Why Tesla’s Profit Win Streak Matters and Makes It Look Like Amazon
Tesla shares continue to defy gravity following a beat on Q2 expectations. Revenues for the quarter were $6 billion, above consensus of $5.2 billion. The big story, though, is that Tesla notched its 4th consecutive quarter for the first time ever. Non-GAAP EPS was $2.18 vs. consensus loss of $0.48.
“Tesla’s profitable June quarter and likely addition to the S&P 500 will be the central takeaway from its most recent earnings report—and a long-awaited acknowledgment from the investment community that Tesla will survive,” according to Loup Ventures Managing Partner Gene Munster.
Amazon playbook: Munster believes Tesla is beginning to look like Amazon, in the sense that profitability will be leveraged to build market share and develop emerging technologies.
“we believe the most important takeaway is that Tesla is following Amazon’s playbook: building a virtuous cycle of reinvesting profits to drive growth, scale, and innovation. Tesla’s valuation will likely have wild swings in the future and move higher over time, similar to Amazon’s trajectory.”
S&P 500 Inclusion: The full year of profitability makes Tesla eligible for the S&P 500 and could result in a spike in volume and an opportunity to raise capital, according to Cowen analyst Jeffrey Osborne.
“We could see Tesla elect to raise capital around the event, similar to what Facebook did in 2013 when it joined the S&P 500. As Tesla potentially is added to the S&P 500, we would expect this to lead to less volatility in the shares.”
EV credit debate: Some Tesla critics are putting an asterisk next to the company’s profitability achievement due to the sale of EV tax credits. Automakers bought a record $428 million worth of credits from Tesla in the quarter in order to comply with emissions regulations. The argument is that profits were fueled by EV credits, not car sales.
“Profits didn’t come from selling more cars, however. Total revenue actually fell 4% from a year earlier. What’s more, the company’s $6 billion top line included $428 million of regulatory credit sales to help rival manufacturers meet emissions mandates. These credit sales are essentially pure profit and accounted for more than 100% of the company’s operating income,” said Charley Grant, Reporter from the Wall Street Journal.
Admitting when you’re wrong: Tesla’s price target was lifted to $1,100 from $300 by Cowen, which has been a long-time bear of the stock.
"We fully admit we have been wrong on TSLA the last few years. Execution on margins, cost control, lower capex and a faster ramp of factories and new vehicles have been above our expectations. TSLA shares tend to "work" when many new things are coming, and we see new factories, vehicle platforms and in-house batteries driving sentiment.”
Meanwhile, Canaccord Genuity upped its price target to $1,623 from $650. The firm cited battery day, semi and cybertruck datapoints, and “profitable energy BU heading into wildfire/hurricane season.”
Looking ahead to Battery Day: There are several catalysts and developments to keep an eye on as the year progresses, but perhaps the most significant is Tesla’s focus on solar and energy. Munster tweeted out that “Musk continues to reference importance of solar and batteries. Reiterates Tesla's mission, accelerate the world's transition to sustainable energy. He's slowly shifting the investor focus away from cars to energy. Company will use battery day late in September to expand.
There is an expectation that Tesla will bring its battery design in-house. Tesla batteries are currently manufactured by Panasonic, China suppliter CATL, and South Korea’s LG Chem.
Munster digs deeper into why “Batteries Are a Big Deal, and Tesla Has an Advantage” in a recent report.
Cowen says “we expect Tesla to announce in-house cell production leveraging the Maxwell dry-electrode graphite technology, which should further aid margins by increasing capex density by ~30%.”
