Bulletin
Investor Alert

The Ratings Game

Feb. 1, 2020, 9:50 a.m. EST

Tesla earnings win praise even from doubters: ‘We fully admit things are better than we expected’

Stock surges after company targets more than 500,000 vehicle sales this year

By Emily Bary


Reuters
Tesla topped earnings and revenue guidance with its fourth-quarter numbers Wednesday.

Tesla Inc.’s sizable earnings beat prompted some humility from skeptics and is drawing effusive praise from the bull camp.

Tesla (NAS:TSLA)  shares rallied more than 12% late Wednesday after the company reported better-than-expected fourth-quarter earnings and gave investors more confidence in the company’s cash-flow position. The stock was headed for another record close on Thursday trading.

Tesla executives also sounded upbeat about the year ahead as the company sets out to sell upwards of 500,000 vehicles in 2020.

See more: Tesla surges after earnings beat, vows to sell more than half a million vehicles this year

Baird analyst Ben Kallo began his note to clients by acknowledging Chief Executive Elon Musk’s assertion that “a lot of retail investors actually have a deeper and more accurate insights than many of the big institutional investors and certainly a better insight than many of the analysts,” which came during Tesla’s earnings call.

“Given our decision to downgrade when shares were ~$150 lower, we accept the criticism,” wrote Kallo, who has a neutral rating on the stock and raised his price target to $650 from $525. He flagged some positive takeaways from the results and conference call, including the factor that China isn’t hurting Tesla’s margins as much as he once thought, but noted that he’s looking for a “more constructive” entry point following the stock’s massive recent rally.

Tesla shares have added 54% over the past month and 109% in the last 12 months, as the S&P 500 (S&P:SPX)  has increased 1.2% and 21%, respectively, over one- and 12-month spans. The stock was poised for another record close Thursday, which would be its 17th since mid-December, and set an intraday record of $650.88 earlier in the trading session.

Opinion: Tesla is finally delivering on Musk’s promises, which are only getting bigger

RBC Capital Markets analyst Joseph Spak wrote that some of his assumptions on Tesla were “misguided,” though he kept an underperform rating on the stock.

“We fully admit things are better than we expected and there is a lot of positive news flow and data points going Tesla’s way,” Spak wrote in a note to clients. Highlights from the report included Tesla’s commentary about increased production capacity and an earlier time frame for Model Y deliveries, but downsides included indications that Shanghai Model 3 production may not have a better margin profile than California production.

Though Spak tweaked his Tesla model to a “probability-weighted target” and increased his price target to $530 from $315, he still sees the stock as overvalued in his base case.

J.P. Morgan’s Ryan Brinkman acknowledged that Tesla made progress last year, notably with free-cash flow, but he maintained that the stock’s valuation is “increasingly disjointed from the fundamentals” given its big run up and the reaction to Wednesday’s results.

“That’s right: for all the talk of a breakout quarter for a hyper-growth company rightfully trading at 96x forward consensus EPS, Tesla in 4Q grew revenue just +2% year over year (despite deliveries +23%) while growing non-GAAP net income just +12% and EPS just +7% (given dilution),” wrote Brinkman, who kept his underweight rating on the stock while lifting his price target to $260 from $240. The new target is almost 60% below Tesla’s current stock price.

Opinion: Facebook stock is falling because it is a victim of its own success

For bulls, however, the report was an opportunity for a victory lap.

“It’s becoming clear, in our view, that Tesla is on a path toward becoming the world’s only relevant publicly listed auto maker,” wrote Piper Sandler’s Alexander Potter.

Potter is impressed by Tesla’s “continued frugality,” which prompted him to cut his capital-expenditure forecast. “We are also giving Tesla more credit for operating leverage, because even after this quarter’s q/q increase in spending, Tesla’s thriftiness continues to impress.” Demand, according to Potter is a “non-issue” as the company prepares for new products and “apparently, an overwhelming number of Cybertruck orders.”

He has an overweight rating on Tesla shares and took his price target up to $729 from $553.

Canaccord Genuity’s Jed Dorsheimer said that the biggest near-term risk for Tesla is its expectation for a one- to one-and-a-half week delay in the ramp of Shanghai Model 3 production due to the coronavirus outbreak.

See also: Opinion: More fuel for Tesla? Stock could join the S&P 500 by the end of the year

“Given the numerous positive data points that were discussed and the cornerstone of continued profitability and (free-cash flow) generation, we view the company as solidly positioned as the leader of the EV revolution,” he wrote. Dorsheimer rates the stock a buy while lifting his target to $750 from $515.

Wedbush analyst Daniel Ives did not hold back in his praise for the company, even though he remains on the sidelines. “Last night completes a ‘comeback story for the ages’ from the dark days seen last April, with clear momentum around global electric-vehicle demand inflection heading into 2020 and beyond with Tesla leading the charge,” he wrote.

Ives expects Tesla’s “bull party” to continue as Shanghai demand looks “very strong.” He was encouraged by the company’s 22.5% automotive gross margin, which he said was “extremely impressive on the heels of the lower-margin Model 3 shift.”

He raised his target on Tesla’s stock to $710 from $550, while keeping a neutral rating. Still, Ives said a run up to $1,000 is within the realm of possibility.

“In our opinion, the new long-term bull case scenario on the stock is $1,000 with Tesla’s ability to ramp production and demand in the key China region during the course of 2020/2021 a major swing factor on the stock and $20 of earnings power by 2024,” Ives wrote.

Staff writer Claudia Assis contributed to this report.

Link to MarketWatch's Slice.