Categories Analysis, Industrials

Buoyed by record Q3, Tesla (TSLA) readies to fire on all cylinders

In the third quarter, both production and deliveries rose in double digits to record highs even as the company continued its capacity expansion drive

The recent performance of Tesla Inc. (NASDAQ: TSLA) has been marked by many surprises and the electric car pioneer once again proved its critics wrong by scaling new heights at a time when the economy slipped to historic lows. Going by the current trend, the company is probably on its way to becoming the unchallenged market leader.

The Silicon Valley auto firm manufactured a record number of vehicles in the early months of the second half, while the manufacturing industry struggled to come out of the COVID-induced slump. There was a corresponding surge in deliveries, reflecting the improvement in buyer sentiment after the shelter-in-place orders were relaxed.

Hold TSLA?

After its unprecedented rally in recent months, Tesla looks overvalued in relation to profitability. Market watchers have warned of a pullback, predicting a 20% decline in the next twelve months. In the coming months, the stock might not stay where it is now and the current trend calls for caution, from the investment perceptive. The best option is to hold the stock for now, if the urge to sell is not strong enough.

The company is on track to start the delivery of Model Y crossover from the Gigafactories in Shanghai, Berlin, and Texas, which says a lot about its resilience to the ongoing virus crisis. When it comes to monetizing the new ventures, Tesla looks to leverage positive factors like the reduction in operating costs, improved vehicle reliability, and the growing demand for locally built/delivered vehicles.

Cash and CapEx

Meanwhile, elevated capital expenditure, mainly related to capacity addition and infrastructure, would be a drag on bottom-line performance in the coming quarters. One bright spot is the improvement in liquidity, after a long period a cash burn, which will help the company take forward the growth initiatives.

Tesla has come a long way from being a loss-making entity over the years, which at times triggered speculation about the sustainability of its business model. It has been generating quarterly profit consistently for more than a year. The management claims to have achieved the capacity to deliver around 500,000 vehicles this year, though a part of that might remain unused.

“Full Self-driving”

According to chief executive officer Elon Musk, the third quarter was the best in the company’s history. Encouraged by the positive momentum, he is going ahead with the ambitious goal of launching “full self-driving”, despite questions are being raised about the reliability of the technology. On the battery front, musk looks to take innovation to the next level to achieve significant cost reduction and better efficiency.

Tesla (TSLA) Q3 2020 Earnings Infographic

There is no need for high-definition maps or a cellphone connection. So the car — the system is designed such that even if you have no connectivity whatsoever and you’re in a place that you have never been to before and no Tesla has ever been there, the car should still be able to drive, just like a person. That is the system that we are developing and aiming to release this year.

Elon Musk, chief executive officer of Tesla

Record in All Metrics

Record vehicle deliveries, combined with strong momentum across business divisions, translated into 40% growth in revenues to about $8.8 billion in the September-quarter. Consequently, earnings more than doubled to $0.76 per share and exceeded the consensus forecast.

Elaborating on his earlier comment that Tesla is a chain of start-ups, Musk said, “Tesla has probably — there’s probably in excess of a dozen startups effectively in Tesla. Every major product line is a start-up. Every big new plant is a start-up and sometimes, frankly, we have to learn a lesson a few times before since then. But even things like service and sales are startups. Other car companies, OEMs, they don’t own their sales and service.”

Read management/analysts comments on Tesla’s Q3 2020 earnings

The stock that languished below the $100-mark at the beginning of 2020, witnessed a four-fold growth since then. Though it retreated after hitting a record high a few weeks ago, the stock is back on the growth path. It opened Thursday’s session at $441.92 and traded higher throughout the session.

Looking for more insights on the earnings results? Click here to access the full transcripts of the latest earnings conference calls!

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