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Tesla 'pulled a rabbit out of a hat in this quarter'

Wall Street showed Tesla (TSLA) some love Thursday, handing shares of the electric automaker their biggest one-day pop since May 2013.

Investors applauded Tesla’s surprise third-quarter profit of $143 million and solid free cash flow. Most analysts were expecting another loss. CEO Elon Musk is also “highly confident” the company will exceed its fourth-quarter delivery guidance of 105,000 cars.

“Tesla very much pulled a rabbit out of the hat with this quarter,” Garrett Nelson, senior equity research analyst at CFRA, told Yahoo Finance’s “The First Trade.”

Nelson raised his rating on Tesla from “strong sell” to “hold” following the earnings announcement and has a $265 price target on the stock, up from from $135 a share. Tesla was trading 16% higher Thursday afternoon, at $296.36.

“The rating change mainly reflects the belief that the pros and cons of this story — and it is a story stock — that they’re more in balance than they have been in several months, so we think a hold rating is now appropriate,” says Nelson.

Still, Nelson fears it may be deja vu all over again.

“The thing is we’ve seen this before from Tesla,” he said. “The third and fourth quarter of last year they posted very healthy profits, and then they swung to pretty significant losses in the first two quarters of this year. So there are questions regarding the sustainability of their earnings.”

J.P. Morgan, RBC, Credit Suisse, and Canaccord all raised their price targets on Tesla’s stock following the earnings news.

Piper Jaffray analyst Alexander Potter has an overweight rating on Tesla with a $372 a share price target.

“Skeptics had legitimate concerns in the past, but Tesla is now building cash, winning market share, and boosting margins — all while preparing to launch products in untapped segments and regions,” Potter said in a note to investors after the results.

Banking on China

In more good news for investors, Tesla said its new Gigafactory in Shanghai had been completed ahead of schedule and is "ready for production" pending final governmental approvals.

While China represents a potentially huge market for Tesla, Nelson said he’s not very optimistic from a margin perspective on the Gigafactory.

In this photo taken Monday, Jan. 7, 2019, and released by Xinhua News Agency, Tesla CEO Elon Musk attends the groundbreaking ceremony of the Tesla Shanghai factory in Shanghai, China. Musk said Monday on Twitter that the automaker is breaking ground for a Shanghai factory and will start production of its Model 3 by the end of the year. (Ding Ting/Xinhua via AP)

“Automakers have shown time and time again that they’ve really struggled to generate any profit over there [in China],” said Nelson. “The per capita income is so much lower than it is in North America, they just can’t afford these kinds of luxury vehicles.”

Bye-bye tax credit

Nelson also points out a potential headwind for Tesla in 2020. The federal electric vehicle tax credit for Tesla goes away at the end of this year, at a time when competition is heating up.

“We expect there will be 30 new electric vehicle [models] on the road by the end of 2020, almost all of which will be eligible for the full $7500 federal tax credit, while Tesla’s tax credit will be zero,” he said.

Alexis Christoforous is co-anchor of Yahoo Finance’s “The First Trade.” Follow her on Twitter @AlexisTVNews.

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