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Is Tesla's (TSLA) Q3 Performance a Sign of What's to Come?

Christopher Vargas

Shares of Tesla TSLA soared after it reported third quarter earnings where it raised cash and increased its margins. Tesla posted just its fifth quarterly profit since going public in 2010, after accumulating a loss of more than $6 billion so far. Since the company was formed, investors pointed to a few persistent problems like a large debt load, sales boosted by government subsidies to buyers, and consistently missed production forecasts.

Elon Musk’s antics are also highlighted as a problem as the sometimes-eccentric behavior the Tesla CEO exhibits has people scratching their heads. The electric car company seems to have made the right adjustments in Q3, but will those adjustments be permanent solutions?

Benchmark Performance?

The question on everyone’s mind after Tesla posted $1.86 per share and $6.3 billion in revenue is: can Tesla keep this up or will the rollercoaster ride continue? Sustained profitability has been on every investor and analyst’s radar when examining Tesla, and this latest report gave investors a nice surprise.

“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,” Piper Jaffray PJC analyst Alexander Potter said in a note to investors after the results. Tesla also shared photos of its new factory in Shanghai where the company says its already begun trial production runs.

The company also said it was ahead of schedule on its long-awaited Model Y crossover, which it now expects to launch by next summer. At the same time, Tesla says it is planning to make a limited run of its Tesla Semi truck next year, and hopes to soon announce the location of its European Gigafactory, where it aims to begin making electric vehicles in 2021. Additionally, in Q3, Tesla released over-the-air software updates including the Smart Summon Feature, which allows Tesla drivers to remotely call and control their cars.

Investors with short positions on the company are feeling the heat after its latest report as they lost about $1 billion on Thursday. Has Tesla finally bested the investors betting against it, or are they not out of the woods yet? Well, the road that lies ahead for the company is anything but a cake walk.

The company needs to deliver at least 104,800 cars in the fourth quarter to meet the low end of its 2019 forecast of 360,000-400,000 vehicles. On top of the daunting number of vehicles it must deliver to reach its forecast, federal tax credits on electric vehicle purchases are set to expire at the end of this year, which can have an adverse impact on the business.

The company is often accused of spending too much to fuel its growth trajectory which is why Q3’s 7% top-line decline was worrisome to some analysts. The bulls contend that Tesla should be valued like a momentum tech name, making its revenue a crucial metric when examining the company. If the company’s revenue growth continues to decline, bullish investors may cut their losses and flee.

Takeaway

For the time being, Tesla short sellers are feeling the heat from the company’s latest surge but some still feel the company is destined to see its valuation plummet. Tesla has its work cut out for it next quarter if it wants to keep the pressure on the 20% of its stock that is being shorted.

The slowing automotive market and decelerating global economy are additional headwinds that Tesla will need to deal with to close out its fiscal year on a high note. The Tesla bulls won this round, but the fight over how to value Tesla will continue next quarter.

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