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Bull of the Day: Tesla (TSLA)

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Shares of Tesla (TSLA - Free Report) have surged over 18% since the company reported better-than-expected Q3 financial results on October 24. Now, as signs once again point to the electric vehicle power’s impressive future, it’s time to see why Tesla stock looks like a strong buy.

Q3 Overview

Tesla’s quarterly revenues surged 128% from $2.98 billion in the year-ago quarter to hit $6.82 billion. This crushed our Zacks Consensus Estimate of $5.67 billion and represented an equally strong 70% jump from Q2’s $4.0 billion.

Meanwhile, at the bottom end of the income statement, Tesla swung from a loss of $2.92 per share in the year-ago quarter to report adjusted earnings of $2.90 per share. This surpassed our estimate that called for a loss of $0.55 per share. Tesla also posted GAAP net income of $312 million.

 

 

Tesla posted these great top and bottom-line performances through better Model 3 sales, along with higher average selling prices, improved automotive gross margins, and reduced operating expenses. Tesla’s mass-market Model 3 was the best-selling car in the U.S. in terms of revenue in Q3—coming in above Toyota (TM - Free Report) , Honda (HMC - Free Report) , and Ford (F - Free Report) —and the 5th best in terms of volume. Weekly Model 3 production during the quarter hit 4,300 units.

Overall, Tesla delivered 56,065 Model 3s at a starting price of $49,000, which helped bring its U.S. total to nearly 70,000 vehicles. Tesla’s strong quarter allowed the company to make good on CEO Elon Musk’s promise to be both cash flow positive and profitable on a net basis in Q3. Before now, Tesla had been profitable in just two quarters.

Price Movement

Moving on from Tesla’s Q3 performance, investors should note that TSLA stock has outperformed the S&P 500 over the last five years. Shares of Tesla have climbed roughly 125% during this stretch, compared to the S&P’s 58% jump. There has certainly been a lot of turbulence over this stretch, but we can see that this trend has continued over the past 24 months. Plus, Tesla stock sits down roughly 11% from its 52-week high of $387.46 per share, which sets up what could be a solid buying opportunity.

 

Outlook

Despite Tesla’s strong third quarter, some investors still worry about the company’s current debt levels. But it seems clear that the company will eventually raise the money it needs by selling more stock. Investors would lose out in the near term, but the cash is needed for Tesla to reach its long-term goals—which seems like a good trade off.

On top of that, Tesla likely boosted investor confidence through improved production rates and efficiency. The company noted that the number of labor hours it took to produce a Model 3 fell by more than 30% from Q2. “In Q4, we will focus even further on cost improvements while continuing to increase our production rate,” Tesla said in a statement.

Looking ahead, our current Zacks Consensus Estimate is calling for Tesla’s Q4 revenues to skyrocket by 113% to hit $7.01 billion. Tesla’s full-year revenues are expected to reach $21.30 billion, which would mark a roughly 81% surge from fiscal 2017. 

Earnings Trends

At the other end of the income statement, Tesla is projected to report adjusted fourth-quarter earnings of $1.80 per share. This would mark a nearly 160% climb from the year-ago quarter’s loss of $3.04 per share. Tesla is still expected to report a full-year loss of $2.10 per share. But, Tesla is projected to post adjusted earnings of $4.74 per share in fiscal 2019.

Better yet, we can see that Tesla’s earnings revisions have trended completely upward over the last 30 days for Q4, as well as for fiscal 2018 and 2019.

 

 

Bottom Line

Tesla’s recent earnings estimate revision activity helps it earn a Zacks Rank #1 (Strong Buy). TSLA also sports a “B” grade for Growth in our Style Scores system and looks poised to turn into the company that Musk and many others always thought it could be.

It is also worth noting that the electric car power said it is excited to bring the Model 3 to Europe early next year, where it noted the mid-sized premium sedan market is more than twice as large as it is in the U.S. Plus, Tesla plans to bring a portion of Model 3 production to China during 2019, designated only for local customers in the world’s second-largest economy.

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