Tesla earnings fail to boost the stock, but analysts are raving about one metric in the results

Published Thu, Oct 21 20217:09 AM EDTUpdated Thu, Oct 21 20218:41 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

Tesla shares were yawning at strong third-quarter results, but Wall Street analysts believe the market may be missing one surprising metric in the electric carmaker's report. Tesla on Wednesday reported record revenue and profit for the third quarter , with net income coming in at $1.62 billion. But Wall Street analysts were particularly impressed by the company's strong margins in the face of a global supply chain crunch. The company's automotive gross margin came in at 28.8% (or 30.5% when including regulatory credits), and its operating margin was 14.6%. Morgan Stanley's Adam Jonas, who has an overweight rating and a $900 per share price target, went so far to say that Tesla may be on on the path to becoming the "the world's most profitable mass auto company." "Annualized 3Q EBITDA is approaching $13bn … getting into GM and Ford territory magnitude, despite a fraction of the revenues. What's particularly notable is Tesla's margin performance despite significant cost inflation and a 6% reduction in [average sales price] YoY," the Morgan Stanley note said. RBC Capital Markets analyst Joseph Spak, who has a sector perform rating on the stock, raised his price target to $800 per share from $755 per share and said the strong margins created multiple options for the company going forward. "While margins may get hit near-term, the power of the model is becoming more evident. How TSLA uses that (and we believe could return to 3Q21 levels in 2H22) to advance their goals is worth monitoring. They could lower pricing to expand demand (have talked about a $25k car, though that sounds unlikely over next few years), reinvest in business for other initiatives or just let it flow through," the RBC note said. Shares of Tesla, which have outperformed the market in October, were down 1% in premarket trading on Thursday. Here's what other top analysts had to say about the report. Baird - Outperform rating, price target to $888 from $764 "Tesla reported exceptional profitability as it continues to flex its operational chops by outperforming its industry peers in delivering strong volumes in an environment marred by supply chain issues while improving profits to an all-time record. We are raising our price target to $888 as the company sits at the nexus of the world's move to a sustainable infrastructure with its efforts in EVs, renewable energy, autonomy and robotics." Jefferies - Buy rating "After delivering another impressive quarter of cost leverage and posting EBIT margin above longer term 'low-teen' guidance, Tesla is reaching a juncture where it can better control balancing pricing, margin and affordability, esp if approaching a tipping point where software becomes a bigger contributor to the business model." Canaccord - Buy rating, price target to $1,040 from $940 "We are bullish on the auto gross margin expansion, and remain excited for battery constraints to abate and be reallocated to energy products later in 2022. After reporting record delivery numbers a few weeks ago, a beat may have been priced-in and shares could see a 'buy the rumor, sell the news' type pull back. We would be buyers at these levels and if any pullback occurs." Bernstein - Underperform rating "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 going forward, which is historically unprecedented. ... .Our biggest contention with underlying bullish assumptions on substantially higher levels of profitability for Tesla longer-term is the sustainability of higher pricing and margins. Given the highly competitive nature of the industry, we believe that over time, differentiated technological innovation will be hard to sustain, and as such, pricing power and surplus margins will be competed away." Wells Fargo - Equal weight rating, price target to $860 from $660 "CEO Elon Musk was not on the Q3 call; rather the CFO & VP of Engineering answered investor questions. His absence could raise concerns about his focus on TSLA vs. his other ventures like SpaceX. TSLA was reluctant to guide margins higher in the near term given expected launch inefficiencies as Austin & Berlin ramp and cost uncertainty. Consistent with the cost concerns, we expect auto margins to moderate in 2022 as BEV raw mat contracts roll off or reset. The stock is trading down slightly post market possibly reflect cost concerns." Barclays - Underweight rating "While we have revised our model up for '22, we remain below consensus as management quietly flagged several headwinds: commodity costs (including supplier pass-throughs), potential production ramp risks in Berlin and Texas, delays to the 4680 cell format which also delays Cybertruck (now guided to late '23) and FSD (full self driving) still well short of true 'robotaxi' capability. While we have no expectation that the market will agree with us, we reiterate our UW and $300 price target." Credit Suisse - Neutral rating, price target to $830 from $800 "The clear highlight of Tesla's 3Q beat was a record margin result, with Tesla benefiting from strong volume and favorable mix. Margin strength is a reminder of the lever Tesla has to eventually reduce prices so as to spur volume higher. More broadly, we maintain our Neutral rating, but raise our TP to $830 from $800. To be more structurally positive on the stock, we believe the narrative needs to accelerate more meaningfully beyond Tesla's core auto biz…specifically vehicle autonomy." Piper Sandler - Overweight rating "When it comes to margins, it's true that Q3 will probably represent the high-water mark - at least for the next few quarters. Tesla will be opening new factories in Texas and Germany, and commodity inflation is an ongoing headache; these issues will inevitably impact margins in Q4 and 1H22. However, looking beyond this near-term choppiness, Tesla should eventually achieve structurally higher margins due to a mix-shift toward software. Once the company completes its transition to a software-first business model, we think there's considerable potential for upside vs. the 23% EBITDA margin Tesla achieved in Q3. Bank of America - Neutral rating, price target to $1000 from $900 "Despite the arguably encouraging 3Q:21 results and TSLA's continued execution, we have trepidation 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." Mizuho - Buy rating, price target to $950 from $825 "TSLA also noted supply chain constraints and rising commodity costs, though it was able to deliver strong cost-downs, with in-house 4680 battery in test phase and on track. Reiterating Buy and raising PT to $950 (prior $825) as we continue to see TSLA and NIO (Buy; PT $67) well positioned, with secular growth in EV driving ~30% CAGR in '20-'30 globally, and TSLA noting its long-term ~50% CAGR production target." Goldman Sachs - Buy rating "We maintain our Buy rating on the stock, and believe that Tesla's record automotive gross margin (excluding regulatory credits) this quarter is a positive indicator for the company's forward earnings potential. Notably, Tesla achieved these results with lower Model S/X mix and with only a moderate impact from the recent price increases (per management comments, and as ASPs were down 6% yoy)." Cowen - Market perform rating, price target to $625 from $580 "Tesla delivered EPS upside as record margins reflected increased volumes and improved mix from Model Y strength. Margin risk near term stems from the ramp of Berlin and Austin (unknowns include new factories and new vehicle designs making ramp timing difficult) while commodity costs remain volatile with pricing power expected to be used as an offset." Deutsche Bank - Buy rating, price target to $1,000 from $900 "We believe Tesla's impressive target trajectory for its technology, capacity and especially cost could help accelerate the world's shift to electric vehicles and extend Tesla's EV lead considerably. We strongly believe that Tesla's plan is a bold attempt to inflect down battery costs much faster than current industry trajectory, which could give it a large competitive advantage."

The Tesla logo seen on a Supercharger rapid battery charging station for the electric vehicles company Tesla Motors.

SOPA Images | LightRocket | Getty Images

Tesla shares were yawning at strong third-quarter results, but Wall Street analysts believe the market may be missing one surprising metric in the electric carmaker's report.