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The Tesla Massacre: Could This Be A Buying Opportunity?

Daniel Laboe

Tesla TSLA released earnings last night, keeping investors in anticipation for almost an hour after the bell. When the trading algos were finally able to code in the sales and EPS miss, they immediately ripped the stock down 10% in after-hours trading. Today traders pulled it down even further from the $264.88 close last night to $227.44 an over 14% drop in less than 24 hours.

I am still optimistic about the future of Tesla. Gigafactory 3 in Shanghai is on track to start producing Model 3’s by the end of the year and the Model Y, a compact SUV, starts deliveries in the US early next year. A European Gigafactory is in the planning stage, which would put Tesla one step closer to world EV domination.

The surge in cash from the convertible bond and equity offering last quarter, along with positive free-cash-flow has eased TSLA’s liquidity concerns, putting them on track to effectively grow the business.

What Happened In Q2?

Tesla delivered a record 95,356 vehicles in Q2, most of which were Model 3s, demonstrating 59% year-over-year topline expansion but still missing marginally missing estimates. Unfortunately, the company also posted a $408 million loss ($117 million of which was associated with restructuring) or an EPS loss of $1.12, missing estimates by 107%.

Free-cash-flow was the one shining star in Tesla’s 2nd quarter results coming in at $614 million. The robust FCF was due to reductions in capital expenditures, although not sustainable in the long run, illustrates systemic operational awareness and improvement.

The biggest issue that investors had with Tesla’s Q2 earnings was the significant margin cuts, which were due to the lower margin Model 3, which is expected to drive the company’s growth in the future. Margins were also pinched from taking a cut on average sales price (APS) for old Model S and Model Xs to get these vehicles off the lot for the newer models.

As the Model 3 scales production, I expect economies of scale will be realized, and margins will expand as sales do.

Buying Opportunity

I see Q2 earnings as a blip in Tesla’s long run drive to take over the automotive world. There is no question that electric vehicles (EV) are the future of transportation on earth, with millennials’ focus on a cleaner world.

Tesla is far ahead of the curve in EV production, with its futuristic design and long-range batteries that no competitor can match. It will be years before the other auto-makers catch up and by then Tesla will be miles ahead. Automakers like General Motors GM, Ford F, and Fiat Chrysler FCAU are all working on adding EVs to their line up within the next few years.

Gigafactory 3 that is almost done being built outside of Shanghai, is going to be a game-changer for Tesla. China’s EV market is double the size of the US’s and should grow as the government pushes more and more incentives.

Tesla is already delivering 850 vehicles a week in the 1st half of 2019 to China, once they are domestically made I see this figure growing exponentially. The firm wants to be producing 3,000 Model 3s a week by the end of this year.

The short term liquidity concern that pulled TSLA shares so far down in the first half of 2019 is no longer a burden.

As more and more Model 3s are produced, the gross margin on each car will be reduced, and the company will be able to attain sustained profitability.

The most significant risk that I see with Tesla is an economic downturn that could significantly cut demand for these expensive vehicles (the ASP for a Model 3 is $50,000).

Take Away

TSLA shares fell over 13% today because of a big margin miss but the issue is not systemic. Restructuring cost having to do with the new Model Y as well as a one-time ASP cuts for old Model S and Model X played a significant role in the margin loss.

There is a significant amount of growth opportunities for this firm, and investors no longer need to be concerned about liquidity. I would not immediately jump into TSLA. The stock could fall further with the downward momentum behind it. Wait for the price to settle before getting in on the action.

Please keep in mind that TSLA is one of the most volatile stocks on the market and I caution you not to put a large position on.


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