Tesla just reported that its unit deliveries for Q2 have met their expectations, and they met anyone’s expectations lately. The market applauded and its stock rose 4.6% Wednesday.
For those who are rooting for Tesla, they are often more than willing to close their eyes a little bit, or perhaps even a lot, when it comes to the results that they announce. The appeal of Tesla stock isn’t really in the last quarter, or even in the next one, as it is longer out where the bigger part of the hope that many investors have for the company and its stock resides.
We’re used to disappointments with Tesla though, and the usual routine is for them to predict more than they actually end up delivering, especially where their earnings is concerned. When they actually meet their expectations, this is a real cause for celebration. This isn’t unlike someone who is in the hospital and when you hear that they aren’t getting worse, this at least can make you feel better.
Tesla makes some pretty desirable cars if you’re out for an all-electric vehicle, although the problem with their growth has always been that their offerings are higher end in terms of cost and have been outside the price range of most car buyers. The newer and still fairly expensive but more modestly priced Model 3 was supposed to change all that. They still have their pricier models, the Model S and Model X, but you no longer have to spend a whole lot of money to own a Tesla with their Model 3.
There is little doubt that this move was needed for them to expand their reach enough to actually do something else besides lose money someday, although sales of the Model 3 has been on the disappointing side thus far, like everything else when it comes to Tesla’s business performance.
Like any manufacturing venture, there are both fixed and variable costs, and you have to achieve a certain quantity of sales to reduce the fixed costs per unit enough to break even. Further increases will then take you to the land of profit, the promised land that thus far with Tesla has been nothing but a promise.
Whether or not Tesla has the potential to achieve the pretty big dreams that some have set for them, the big hurdle has been to show us that they can make a go of this. After all these years, we haven’t had anything but promises, ones yet unfulfilled.
Selling More Cars Generally is a Step in the Right Direction
When you’re losing money, the place to start looking for any turnaround that may happen is with a company’s deliverables. Tesla forecasted between 90,000 and 100,000 in quarter 2, but for the actual number to be in this range, this would come as a surprise, as analysts have been setting the bar beneath this as a matter of habit.
The actual number came in right in between the company’s projected range, at 95,200. Tesla not only achieved what they promised, but nailed the number right in between. This met their expectations, but more importantly, exceeded the more cynical predictions of Wall Street. This is definitely good news.
Tesla was already in the midst of a rally since early June, after dropping from a high of $377.44 on December 13 of last year and falling all the way to $176.99 a share on June 3. When you lose over half the value of your stock in less than half a year, these aren’t exactly good times or a good time to be owning the stock.
June brought us a significant market rally though and Tesla was one of the many boats that got raised up by this, and after a rundown of 53%, this no doubt weeded out a lot of people who were less than excited about Tesla. New money being brought into the market therefore found less resistance than during the other bull periods this year, and by the time July 2 arrived, it closed the day at $224.55.
The almost $50 a share it added in just a month may look impressive, and in sort of is, but that’s only a quarter of what was lost during the previous 6 months that the bears were at the wheel. This at least was encouraging and also dulled some of the pain that its longer-term investors had to bear during this lean time.
Wednesday’s good news added almost $14 a share more to this new bounty, and further reinforced the newfound optimism. The markets also put in all-time highs on Wednesday, so this certainly doesn’t hurt, nor does better news on the Chinese front, which affects Tesla quite a bit
Tesla is even building a new factory in China, so what happens with China certainly matters to them, as selling more cars than expected does. Put the two together and you end up with a brighter outlook to an otherwise troubled stock.
Most of the progress in their deliverables has come from the Model 3, not surprisingly, with Tesla selling 77,000 of these compared to only 17,000 of the more expensive Model S and Model X combined. The Model 3 was supposed to be the new savior of the company and we’re at least seeing more saving going on now.
Tesla’s Financial Results Will Still Tell the Real Story
The bottom line still matters the most, and how Tesla’s Q2 financial results come out will tell an even bigger story. No one expects anything but more losses in Q2, but many are thinking that the car company will turn a profit as soon as Q3, which would be a real shot in the arm for the stock.
Tesla did not provide any financial guidance in this current report, and while we may take that as their not having much of a good story to tell here, we’ll really need to wait and see how this comes out. It also may be that they may have overstated them as usual and they are turning a new leaf and looking to get closer on this. Their numbers from last quarter and year to date are simply terrible though, so being less terrible may be good enough right now, and if not, will have to suffice in any case.
The company is at least improving its cash flow position, which some analysts expect to continue. Tesla is choked by debt, and in particular, all the junk bonds they have out there, and more cash in their hands, even though it may just get spent, is at least a good sign that they may be able to move closer to the top of the big pit that they have been in since the company started.
There is a federal tax credit that is expiring though, and even the progress that they have made with their deliverables may be short lived. If this backs off and they don’t make much progress on their quarterly and annual losses, this latest surge in stock price may be pretty short-lived, and it’s not hard to imagine our testing the bottom set in early June.
Analysts that follow this stock still remain divided, but what is noteworthy is that the bulls tend to cast their gaze pretty far out, while the bears look more at the numbers. When the numbers overall are this ugly, it does pay to look beyond them as much as you can if you’re looking to remain optimistic enough.
Trip Chowdhry of Global Equities Research believes that our appetite for technological innovation will be sufficient to continue to drive demand, and even goes as far as claiming that “every iPhone user is a potential TSLA customer.” It’s not clear why he is singling out iPhones over some competitors such as Samsung which are clearly ahead of Apple in terms of innovation, but it’s safe to say that a lot of people who own phones may want a Tesla, affording one is another question.
In the other camp, Needham’s Rajvindra Gill “cautions on TSLA’s ability to remain profitable and maintain healthy margins.” If they ever get to a position where they are profitable and maintain healthy margins, they may or may not be able to maintain this, but they need to get there first and we’re quite a way off from this yet.
There are indeed some long-term concerns about Tesla’s profitability as well as the obvious shorter term ones, and all of this should be factored in if you are a longer-term bull on the stock, but even these investors need to heed the shorter term lest they hold the stock during times where it’s clearly not the right time to be in it no matter where you think it will end up eventually.
This is still not a very exciting stock or company overall right now in spite of it getting off skid row for a while in terms of its stock price. It may have found a cheap apartment for now, and many may still think that it will end up in a luxury one in the sky one day, they still need to make the rent payments or be back on the street, and rent is due next month when we see their financial reports.
There’s nothing wrong with riding this wave though and those who have been paying attention enough may have spotted this little rally fairly early on, with both its price and the market being aligned. The time to get off a ride like this is when it stops, and it hasn’t yet, and in fact has picked up the pace a little now.
Longer term, as in holding it through future declines, things are considerably less certain, and positions like this do require a good amount of faith to hang on. Faith with stocks does need to be well grounded in reality though. We will need a lot more than their selling the number of cars in a quarter that they said they would to address the bigger issues here.