Source: PaxForex Premium Analytics Portal, Fundamental Insight
Tomorrow Tesla will introduce its earnings report on the results of the third quarter. After the announcement of record shipments in the third quarter, expectations for the financial performance of the electric car manufacturer for this period are high. Moreover, the rapid growth in share prices last year has raised the odds that Tesla will continue to grow rapidly.
Will the carmaker be able to withstand this excitement?
In anticipation of the report, some investors may be wondering if they should buy shares in a growing company before the news. After all, if Tesla announces higher-than-expected profits and earnings per share, the stock could jump.
To better understand if the shares of an electric car company are attractive today, here is a brief overview of earnings and an analysis of the current stock valuation.
Earlier this month, Tesla said it delivered 139,300 vehicles in the third quarter. It was a huge leap compared to the second quarter when the main car plant was temporarily forced to close due to the pandemic. Vehicle shipments increased consistently by 53 percent in the third quarter. However, the growth was also impressive compared to the previous quarter - the period when Tesla production was at full capacity. Supplies increased by 43% for the year.
In 2020, Tesla's business will benefit from the launch of the new Model Y SUV earlier this year. Since Model Y is the company's most affordable vehicle, management expects sales to eventually compete with Model 3, Tesla's best-selling electric car.
Analysts expect that strong growth in Tesla sales will also lead to impressive sales growth. On average, analysts expect Tesla's revenue to grow 31% year on year to $8.26 billion, while non-GAAP (adjusted) earnings per share would jump 51% to $0.56.
Given that the Tesla business is fully operational, is it worth buying Tesla shares on the eve of the report?
A car maker's earnings report can, indeed, make shares skyrocket after the release. But stocks can just as easily get off the rails if Tesla fails to reach one of the indicators. It's just too difficult to predict in what direction stocks will move after the report.
What's more, equity investments should be based on investor perceptions of a company's long-term potential in any case, rather than on one quarter's results.
Going beyond the current quarter, investors should note that Tesla's stock valuation is already in a massive upside phase over the next decade. The market capitalization of the company is over $400 billion, even though the income for 12 months is only $26 billion. Free cash flow, or excess cash flow remaining after the completion of both normal operations and capital expenditures, was only $800 million for the same period.
Probably, the market has already risen in price both in terms of maintaining leadership in the segment of electric vehicles and terms of a significant increase in the share of the global automotive market as a whole. Since so much optimism has already been built into the share, we should have waited for a better entry point than $445 per share. Perhaps, if investors are lucky and the stock falls below $400 after the earnings report, it could start looking extremely attractive.
For now, however, it would be wise to wait for the report itself on Wednesday. Of course, there is no guarantee that the Tesla stock will ever retreat to that level again. But many people do not mind waiting on the sidelines, hoping for a more reasonable valuation.
At the same time, according to New Street analyst Pierre Ferragu, the company's shares could rise to $578 within the next 12 months. This optimistic price target represents more than a 35% upside to the current price.
The thesis that Tesla will become a profitable premium carmaker is increasingly accepted as a fact, says the analyst. It is different from previous years when many investors were arguing about whether the company will survive at all. Besides, Ferragu believes demand will be high for the company, and the only constraint to Tesla's growth over the next five years is its ability to increase production. That will lead to strong pricing policy and increased margins for this core segment, Ferragu said.
Beyond cars, the analyst points to the company's growth rate in the energy market. Solar and battery storage products are helping Tesla gain an additional $750 billion target market.
While the price is above 380.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 439.67
- Take Profit 1: 549.00
- Take Profit 2: 595.00
If the level 380.00 is broken-down, follow the recommendations below.
- Time frame: D1
- Recommendation: short position
- Entry point: 380.00
- Take Profit 1: 305.00
- Take Profit 2: 261.00