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Stock Analyst Update

Tesla's Surprise Profit Blows Away Consensus

Tesla is a volatile name and fair value estimate changes may be frequent as its story changes.

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Tesla (TSLA) reported third-quarter results with a surprise profit that blew away consensus. Adjusted diluted EPS of $1.86 easily beat consensus of a $0.42 loss and Tesla had a GAAP profit of $0.78 per share. GAAP free cash flow of $371 million declined from the prior year quarter’s figure of $881 million but the company finished the quarter with a comfortable cash figure of $5.3 billion. Revenue declined year over year by 7.6% to roughly meet consensus of $6.33 billion. Total deliveries rose 16% year over year to 97,186 and by 1.9% sequentially. Model 3 should lead growth for the next several quarters until the Model Y crossover is at decent production volumes. The sedan’s deliveries grew sequentially by 2.7% but rose by about 42% year over year, while Model S and X combined deliveries fell 36.9% year over year. The company is “highly confident” its 2019 total vehicle deliveries will exceed 360,000 and we agree but the top end of prior delivery guidance of 400,000 was not mentioned. The stock rose 20% after hours on Oct. 23 due to the EPS beat and Tesla saying the Model Y will now start production next summer instead of in late 2020.

Although the S & X are higher priced than the Model 3 and Model Y, we agree with CEO Elon Musk that the 3 and the Y are the future of Tesla as these vehicles will bring the volume it needs to get more scale. Given Americans' love of crossovers, it is the largest U.S. vehicle segment at over 40% of new vehicle sales, and other vehicles coming such as a pickup truck in a few years, we are substantially raising our vehicle delivery projections through 2028 which causes our fair value estimate to rise 41% to $326. We remain concerned about Tesla’s debt load so if free cash flow becomes insufficient to service debt, we may raise our weighted average cost of capital. All else constant, that move would lower our fair value estimate to as low as $206. Tesla is a volatile name and fair value estimate changes may be frequent as its story changes.


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David Whiston does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.