Investor's Corner

Wall St. sends Tesla (TSLA) stock soaring 10% amid renewed confidence in profitability

Tesla shares (NASDAQ:TSLA) are rallying after the electric car maker beat Wall Street’s revenue estimates by posting $4 billion in revenue, consisting of $3.36 billion from its automotive business and $374 million from its energy and battery storage division. Topped off by a successful earnings call that seemingly restored investors’ positive sentiments towards the company, Tesla appears to have finally hit a turning point in its struggle to achieve profitability.

Tesla’s second-quarter earnings call saw a more restrained Elon Musk. During the Q&A session, Musk stated that Tesla would start showing profits each quarter going forward, while maintaining that the company would not need an equity capital raise. Musk and Tesla’s executives also noted that high-profile projects, such as Gigafactory 3 in Shanghai, would not have as much CapEx as its other facilities like Gigafactory 1 in Nevada. According to CTO JB Straubel, the lessons that Tesla learned in its US facilities over the years will be applied to all of the company’s future projects.

“We found a surprising amount of ways to improve efficiency and speed and density as well in Gigafactory 1. And all those lessons will absolutely be shared with Gigafactory 3. The teams are already, of course, beginning to collaborate and start to do this more efficiently with less cutbacks than last time,” Straubel said.

The company’s encouraging numbers and positive earnings call aside, one thing that truly stood out was Musk’s apology to Wall Street analysts Toni Sacconaghi from Bernstein and Joseph Spak of RBC Capital Markets, who were cut off during the first-quarter earnings call. Musk noted that while he was incredibly tired then, there was “no excuse” for his behavior.

Coupled with the company’s better-than-expected financials, Musk’s apologetic, humble behavior in the earnings call appears to have rejuvenated investors’ sentiment about the company. During after-hours trading on Wednesday, Tesla stock surged 8.5%, adding about $4.75 billion the company’s market cap. On Thursday’s pre-market, Tesla stock was up 8%, maintaining its momentum. In a note to clients on Wednesday, Keybanc analyst Brad Erickson dubbed Musk’s apology as “maybe the most valuable apology of all time.”

“Elon Musk apologized multiple times for his inappropriate behavior on last quarter’s call. TSLA’s forward commentary was mostly better than feared and the CEO worked to restore some faith and credibility with investors that he can be a plus to the investment narrative, not a minus,” Erickson wrote.

While Tesla’s earnings of -$3.06 per share were slightly worse than analyst estimates of -$2.92 per share, Piper Jaffray analyst Alexander Potter stated in a note to clients on Wednesday that Q2 2018 could be a turning point for the company. Potter also raised his price target for TSLA to $389 from $369, representing 29% upside to Wednesday’s close.

“This could be the start of something big. A few years from now, investors may conclude that 2Q18 was the quarter in which Tesla cemented its position as a truly formidable player in the global automotive market,” the analyst said.

Even Goldman Sachs, which has a Sell rating on Tesla stock, admitted that the second quarter was “solid” for the electric car maker, considering that automotive gross margins, cash burn, and ending cash balance were better than expected.

“This was a positive quarter. Automotive gross margins, cash burn, and ending cash balance were better than expected. In addition, the company may have turned the corner on its historical operational misexecution. We see the second quarter as a positive step for Tesla as a manufacturing organization, but a step that requires continued forward momentum in cost control, operating efficiency, and ultimately positive cash flow.”

Tesla stock opened strong on Thursday, up 9.22% and trading at $328.44 per share.

Disclosure: I have no ownership in shares of TSLA and have no plans to initiate any positions within 72 hours.

Wall St. sends Tesla (TSLA) stock soaring 10% amid renewed confidence in profitability
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