Tesla ex­ceeds dark ex­pec­ta­tions, ‘squarely on its own two feet now’

Calgary Herald - - FINANCIAL POST - ESHA DEY

NEW YORK It was only a few months ago that Wall Street was bash­ing Elon Musk’s Tesla Inc.

One an­a­lyst called the stock “no longer in­vestable,” cit­ing Musk’s er­ratic be­hav­iour in tweets and taunts. A short seller bet on a dra­matic drop, say­ing it’s “more and more ap­par­ent that Tesla is hav­ing dif­fi­cul­ties pay­ing their bills.”

But an un­ex­pected thing hap­pened along the way: The com­pany found its foot­ing as an elec­tric-car man­u­fac­turer, an achieve­ment masked by Musk’s blus­ter. Its stun­ning third-quar­ter profit pic­ture, boosted by its abil­ity to ramp up pro­duc­tion of Model 3 sedans, sur­prised naysay­ers, and marked the be­gin­ning of a turn in mar­ket sen­ti­ment.

Tesla’s stock is, some­what im­prob­a­bly, right back near the highs it reached on the day of that in­fa­mous “fund­ing se­cured” tweet that caused a fu­ri­ous rally be­fore land­ing Musk in trou­ble with the SEC.

And so af­ter a year of stom­achchurn­ing swings that saw the stock post half a dozen ral­lies or sell­offs of 20 per cent or more, it is up nearly 18 per cent. Not bad at all when you con­sider that the S&P 500 is down 1.4 per cent on the year.

All of this, of course, could eas­ily shift again at al­most any mo­ment, given Musk’s pen­chant for im­politic re­marks and the many op­er­a­tional chal­lenges. But for now at least, Wall Street is bullish once again, ex­pect­ing Tesla to be prof­itable and have pos­i­tive free cash flow in the fourth quar­ter — ac­com­plish­ments that would show the com­pany has fi­nally fig­ured out how to pro­duce cars at a sta­ble pace and make money while do­ing it.

“Was the third-quar­ter a fluke? Time will tell,” said Roth Cap­i­tal Part­ners an­a­lyst Craig Ir­win. “But the re­al­ity is that when you pro- duce 50,000 cars a quar­ter, that is a big mile­stone, and you can see these guys are here for the long run. Tesla is squarely on its own two feet now, and learn­ing and well pre­pared to keep learn­ing.”

Tesla’s stock has al­ways been priced for per­fec­tion, and Musk’s Twit­ter habits weren’t the only road­blocks that in­vestors faced in 2018. As it fran­ti­cally tried to boost pro­duc­tion of the Model 3, Tesla was burn­ing cash at a rapid pace — as much as US$8,000 a minute as it en­tered the year, ac­cord­ing to Bloomberg cal­cu­la­tions. Musk ac­knowl­edged how dire the prob­lem was in an in­ter­view last month, say­ing the com­pany’s ear­lier cash bleed had left it just a cou­ple of months away from col­lapse.

Tesla’s fun­da­men­tals are now im­prov­ing, helped by in­creas­ingly ef­fi­cient man­u­fac­tur­ing, strong prices of its cars, and the “slow and dis­ap­point­ing ” com­pe­ti­tion in the elec­tric ve­hi­cle mar­ket, Op­pen­heimer an­a­lyst Colin Rusch wrote in a note pub­lished on Wednes­day. “We believe as TSLA de­liv­ers steady cash flow, a new group of in­vestors will be­gin tak­ing po­si­tions, help­ing drive shares higher.” Tesla shares jumped as much as 1.4 per cent in New York.

Plenty of rea­sons for skep­ti­cism re­main. Tesla is still highly lev­ered up and 2019 is go­ing to be an “up­hill bat­tle,” Cowen an­a­lyst Jef­frey Os­borne said. He cited the ex­pi­ra­tion of elec­tric ve­hi­cle tax cred­its and the lack of pent-up de­mand for elec­tric cars that helped Tesla in 2018, among other things.

And de­spite the cor­po­rate gov­er­nance re­forms in Tesla’s set­tle­ment with the SEC, the com­pany is still at the mercy of Musk to con­trol his be­hav­iour as its pub­lic face and chief de­ci­sion-maker. He re­sponded to an ex­o­dus of top ex­ec­u­tives this year by as­sum­ing some of their re­spon­si­bil­i­ties him­self, and he bris­tled in a 60 Min­utes in­ter­view at the idea that he now has a babysit­ter su­per­vis­ing him.

But Tesla’s pre­mium val­u­a­tion to­day re­flects its lead­er­ship in elec­tric cars, far ahead of po­ten­tial com­peti­tors. An­a­lysts said they weren’t im­pressed by two wouldbe elec­tric ri­vals un­veiled this year by Audi and Mercedes-Benz.

Gen­eral Mo­tors, which is ex­pected to sell about 4.7 mil­lion ve­hi­cles glob­ally this year, had a mar­ket cap­i­tal­iza­tion of US$49 bil­lion through Tues­day. Tesla’s is nearly US$63 bil­lion though it’s likely to sell only 256,000 ve­hi­cles.

“It is in­cred­i­ble to me, at the end of 2018, that the ma­jor au­tomak­ers still haven’t fig­ured out how to re­spond com­pet­i­tively to Tesla,” JMP Se­cu­ri­ties an­a­lyst Joseph Osha said.

“Tesla plau­si­bly can grow at eight-to-10 per cent for a re­ally long time, so it should be val­ued a lot more highly than com­pa­nies grow­ing at one or two per cent, which is what the rest of the auto busi­ness is grow­ing at.”


De­spite the blus­ter of CEO Elon Musk, above, and many op­er­a­tional chal­lenges, Wall Street is bullish on Tesla again.

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