Electric vehicle maker Tesla (TSLA) takes its place as one of the most controversial names on Wall Street; either you love it or you hate it. However, even the company’s naysayers can’t deny it’s on a roll recently, with its stock up 98% year-to-date and delivering a surprisingly solid first quarter performance.
During its most recent quarter, Tesla reported earnings on gross margin that flew past the consensus estimate, with OpEx also coming in well below expectations. Looking specifically at its Shanghai plant, the company believes Model 3 production will achieve a rate of ~4,000 cars per week (~200,000 per year on a run rate basis) by mid-2020 thanks to robust progress at the site. It should be noted that in the first quarter, only the Standard Range Plus version of the Model 3 was produced in China. However, in April, the Long Range and Performance Model 3 versions were added to the lineup.
Writing for Needham, five-star analyst Rajvindra Gill expanded on this, noting, “…the gross margins of China-produced Model 3s mirrors those produced in Fremont. Gross margin is expected to further improve on lower manufacturing costs. Partially offsetting this is TSLA’s decision to reduce the price of the Standard Range Model 3 in China starting May 1 to qualify for government subsidies on EVs.”
Adding to the good news, Model Y vehicle production in Fremont has been ramping up since January of this year through the use of new production lines as well as shared capacity with Model 3. After kicking off deliveries of higher-ASP Model Y variants during the quarter, gross margin landed in the green. Not to mention Tesla has been bumping up capacity for Model Y at Gigafactory Berlin and Gigafactory Shanghai, with deliveries slated to begin in 2021.
That being said, these positive developments weren’t enough to convince Gill to join the bulls.
“Given the uncertain macro environment, TSLA declined to give N-T profit guidance or reaffirm its prior guidance of 500K deliveries in ’20. Thus, we remain cautious on TSLA’s performance for the remainder of 2020, as automotive demand has largely collapsed in the US and Europe due to the impact of COVID-19,” Gill explained.
Especially concerning for the analyst, though, is the closure of its factory in Fremont due to the county-wide shelter-in-place order. While the plant was originally supposed to reopen on May 4, this date was further delayed. As a result, Gill thinks the shutdown will have a significant effect on Tesla’s second quarter earnings, with management also declining to provide near-term earnings and free cash flow guidance.
Gill added, “In the long-term, we continue to expect margin pressure from declining sales of higher-margin Model S & X vehicles (gross margins of 25-30%), a lower mix within Model 3, and competitive pressures from other automotive OEMS as they launch their EVs over the next few years.”
To this end, Gill left an Underperform call on the electric car company, while declining to set a specific price target. (To watch Gill’s track record, click here)
Turning now to the rest of the Street, other analysts are also cautious when it comes to Tesla. 6 Buy ratings, 10 Holds and 10 Sells add up to a Hold consensus rating. At $595.15, the average price target brings the downside potential to 28%. (See Tesla stock analysis on TipRanks)
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