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Tesla (TSLA): Wait On Sidelines Despite Strong Q2 Numbers, Says Analyst

Tesla (TSLA) exceeded Wall Street’s delivery expectations in Q2, which is a major relief for the company coming off a terrible first quarter, but Wall Street already has a new focus for the company: margins and FY19 unit deliveries.

Tesla set a high bar for its deliveries this quarter, projecting 90k-100k in its Q2 quarterly guidance, and it followed through with its Q2 delivery number coming in at 95,200 in an announcement made on July 2nd. Analysts were impressed with the Model 3 unit number for Q2, and although the Model S/X sales improved from Q1 they were still down from Q2 2018, showing that the Model 3 is cannibalizing some of the Model S/X demand.

With such strong Model 3 numbers and the line’s increasing importance to Tesla’s mass-market appeal, it is fair to wonder why the stock did not jump more post-announcement. Jeffries analyst Daniel Ives believes “there are fundamentally three questions that remain the lingering clouds around the Tesla story right now.” As a result, Ives has not changed his Neutral rating and $230 price target on the stock. (To watch Ives’ price target, click here)

Ives first concern with Tesla is about the sustainability of the increase in Model 3 demand in this past quarter. On July 1st, the tax credit for electric vehicles was reduced, which may have pulled forward some demand from the third quarter to the second, boosting Tesla’s quarterly sales in a way that is not sustainable going forward. This happened six months ago when the tax credit was reduced on January 1st. His second concern is about the company’s profit margins in the quarter, as this information was not released in the announcement on July 2nd. Finally, he wonders if Chinese and European demand growth for Tesla’s vehicles will keep up with the production capacity increase coming with the completion of Giga 3.

Ives credits Musk and Tesla for its Q2 delivery results but is focused on its ability to hit the 2019 unit guidance of 360k to 400k units. Ives believes that “~350k is likely the line in the sand.” However, balancing delivery success with profitability will be tough, and Tesla ultimately needs to show that it can hit 20%+ gross margins going forward.

Ives thinks that Tesla ultimately “is in the drivers seat for the transformational EV market opportunity over the coming years,” but has short-term challenges that prevent him from placing a Buy rating on the stock. Wall Street agrees as TipRanks analysis of 26 analyst ratings on Tesla over the last three months show that there is a consensus Hold rating on the stock. 9 analysts recommend Buying, 5 advise to Hold, and 12 are Selling. The average price target on Tesla is $262.64, which is a 12.7% upside on the current share price. (See TSLA’s price targets and analyst ratings on TipRanks)

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