Categories Analysis, Industrials

After confirming turnaround, Tesla (TSLA) to go full throttle on expansion

Continues to expect capacity installed to exceed 500,000 vehicle deliveries this year, despite the COVID-related disruption

Tesla, Inc. (NASDAQ: TSLA) continues to stand out in the automotive sector with impressive performance, despite treading an unconventional path. The electric car maker has consolidated its turnaround by recording profit for the fourth consecutive quarter. The latest financial report surprised everyone as the market was expecting negative earnings.

Related: Ford strikes new partnership to improve capabilities

Earlier this month, Tesla’s shares crossed the $1500-mark for the first time after setting records consistently for more than a year, all along outperforming the market. With a good track record that cannot be matched by many, Tesla remains an investor’s favorite. But the problem with stock is the high price that makes it unaffordable to many.

Valuation

The high valuation gives the impression that the stock has hit the peak – the weak target price justifies that. In short, it is not the right time to buy Tesla. The general market volatility and deterioration of Washington’s relation with China – currently a crucial market for the company –  call for patience as far as selling the stock is concerned.

Recently, CEO Elon Musk locked horns with the authorities as he reopened the California production facility defying the lockdown orders, resulting in a legal standoff that was resolved later. The aggressive move seems to have helped the company, as the production and delivery of Model 3 and Model Y increased in the June-quarter compared to last year.

Bullish on FSD

Announcing the Gigafactory that is coming up in Texas, Musk said at the second-quarter earnings conference call that Tesla would continue its expansion activities in California and also take the self-driving program to the next level, by upgrading the fleet to full self-driving (FSD) with cutting-edge technologies like artificial intelligence and monetizing the software.

“Right now, by far, FSD is just overwhelmingly the most important thing. I think the upgrading of the fleet to full self-driving essentially with an over-the-air software update, it may go down as the biggest asset value increase in history as a step change. Maybe there’s something bigger. But it’s certainly would be one of the biggest. I can’t think of anything bigger,” said Musk in response to a question.

Tesla (TSLA) reports profit for Q2, despite lower revenues

While Tesla continues to enjoy high demand, issues related to production supply chain pose challenges in making timely deliveries. Musk reaffirmed Tesla’s resolve to produce and sell electric vehicles at affordable prices, rather than looking for profit. Also, there will be increased focus on Tesla Insurance and the energy business, which the company believes would outsize the automotive business in the long term.

Plays Down COVID

Tesla executives chose not to comment on the pandemic issue directly but made veiled remarks. But they withheld the regular guidance, citing the uncertainties in the market. Meanwhile, the recent improvement in cash flow, with cash balance spiking to a record high of $8.6 billion, should help the company take forward its growth plans including capacity expansion. Interestingly, Tesla’s performance in the first half contrasted with that of the automobile industry, which has been hit hard by the market turmoil.

Defies Forecast

In the second quarter, the tech firm swung to a profit of $2.18 per share from the $1.12-per share loss recorded last year. Though revenues rose sequentially to about $6 billion and topped expectations, it was down 5% from last year. The impressive bottom-line, which defied analysts’ forecast for a loss, brought cheer to investors. The improvement mainly reflects the management’s aggressive cost-cutting initiatives.


Looking forward to listening to management/analysts’ comments on Q2 results? Check Tesla’s Q2 2020 earnings call transcript 


“To ensure the business remains healthy, we took temporary action to reduce costs including expenses related to personnel and non-critical patent projects. The direct cost savings — or the direct cost impact of the temporary shutdown was largely offset by these cost savings actions, although the costs were concentrated in COGS and the cost reductions were in both COGS and operating expenses.”

Zachary Kirkhorn, chief financial officer of Tesla

On Thursday, Tesla’s stock opened high and traded close to $1600 during the session. In the last four months alone its value rose three-fold, after a short-lived pullback in the early days of the COVID outbreak. It got a fresh boost after Wednesday’s earnings report and has maintained the uptrend since then.

Stay tuned to access our earnings call transcripts here

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