Tesla (TSLA) Beats EPS and Revenue Views on Improving Gross Margins, Analysts Praise Very Solid Quarter But Warn of 'Aggressive Valuation' as Stock 'Priced to Perfection'

October 21, 2021 6:04 AM EDT
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Price: $1,089.40 -2.38%

Rating Summary:
    24 Buy, 21 Hold, 12 Sell

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    Up: 0 | Down: 2 | New: 5
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Shares of Tesla (NASDAQ: TSLA) are down about 1% in pre-open Thursday despite the EV giant posting better-than-expected Q3 results.

Elon Musk and Co reported Q3 EPS of $1.86 to beat the analyst estimate of $1.58. Revenue for the quarter came in at $13.76 billion versus the consensus estimate of $13.62 billion.

Record results were fueled by even stronger gross margins - 30.5% on the auto business and 26.6% overall.

“The third quarter of 2021 was a record quarter in many respects. We achieved our best-ever net income, operating profit and gross profit. Additionally, we reached an operating margin of 14.6%, exceeding our medium-term guidance of “operating margin in low-teens”. Perhaps more impressively, this level of profitability was achieved while our ASP2 decreased by 6% YoY in Q3 due to continued mix shift towards lower-priced vehicles. Our operating margin reached an all-time high as we continue to reduce cost at a higher rate than declines in ASP,” the company said in a press release.

BofA analyst John Murphy described 3Q results as “very solid” and raised the price target to $1,000.00 per share from the prior $900.00 but reiterated a Neutral rating.

“3Q:21 results were a bit better than expected, and generally solid across the board. Specifically, revenue came roughly in line with our estimates (revised following the deliveries report), while gross margins were largely stronger than expected (particularly Automotive), and operating expenses were below estimates, owing to the bottom line beat. Additionally, free cash flow was a positive surprise in the quarter, specifically reported FCF of $1.3bn, adding credence to the notion that TSLA has reached self-funding status. Following the solid 3Q:21, we are raising our forward estimates,” Murphy said in a client note.

Still, the Neutral-rating reflects concerns that TSLA stock “may already be priced to perfection, such that near-term earnings beats may be insufficient to get bulls incrementally positive on the stock.”

“That being said, TSLA’s performance (and valuation) does add some validity to the investment stories behind many of the newer EV automakers. Ultimately, it remains to be seen whether or not TSLA will be dominant over the long-term; however, we continue to believe that as long as the company can fund outsized growth (new model introductions, capacity installation, etc.) with little to no cost of capital, as it has over the past decade, its high stock price will be justified,” Murphy concluded.

Bernstein analyst Toni Sacconaghi, who rates Tesla as Underperform with a $300.00 per share price target, praised the company for doing an “exemplary job managing through supply chain challenges in the quarter, with the company producing at close to 95% of its stated factory capacity.”

However, he also joined Murphy in arguing valuation is too high.

“We continue to struggle to justify TSLA's valuation, which is higher than all other major auto Makers combined and appears to imply huge volume AND industry leading profitability forward, which is historically unprecedented,” Sacconaghi wrote in a note to clients.

Shares of Tesla closed at $865.80 yesterday.

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