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What Was Behind Tesla's Blowout Quarter?

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Tesla (TSLA - Free Report) reported revenue of $6.30 billion, 3.28% short of the Zacks Consensus Estimate of $6.52 billion. Earnings of $0.78 blew away the estimated $1.47 per share loss. So the big question is, where did that surprise come from?

Since revenue wasn’t a factor, it must have been cost reduction. Or efficiencies. Maybe both. Let’s see.

According to its press release, only 27 bps of the 393 bp sequential increase in automotive gross margin was attributable to regulatory credits. The rest was on account of “fundamental improvements” in its operating efficiency. And that included things like higher volumes (it delivered almost as many Model 3s as it produced in the quarter), manufacturing and material cost reduction, recognition of some Smart Summon-related deferred revenue, as well as FX.

Musk has been criticized for taking too long perfecting the manufacturing line, of not producing quickly enough, of missing production targets, of not generating profits or cash flow, of being inexperienced in car making and also of course for speaking his mind. To a certain extent, all of that is true. But it’s also true that his main problem was that he didn’t know how to deal with Wall Street. And these guys can be unforgiving.

He has consistently said that getting the fully-automated production line perfected was the first step toward getting the whole business in order and that is what I think we saw in this quarter.

And it isn’t just operating efficiencies. Since Tesla has so much innovation in the manufacturing line itself, the ability to perfect it will mean that it can set up these units faster, more efficiently and using less resources. That will mean even more cars on the road even quicker, creating a competitive edge over traditional automakers. Its Gigafactory in China for instance, is up and running in 10 months (trial vehicles being produced, manufacturing license and other regulatory requirements underway). Additionally, the Model Y production line is now being equipped and should be production-ready ahead of schedule, because of experience gained in its Gigafactory in China.

Another competitive edge that others may catch up to more easily is the mileage of a Tesla that is achieved through more efficient battery usage. The company says, “Our current shortest-range vehicle is on parity with the longest-range production EVs offered by other companies. Long-range models of each Model S, X and 3 continue to have 20-40% higher range than any other EV available.” That is a bold statement and is no doubt one of the reasons why Teslas remain so hot, even when customers could do with easier access to service.   

The other high point of the quarter was positive cash flow. Musk said a number of quarters back that the company would be cash flow positive in quarter three. How exactly it got there, whether through restructuring, cost cutting, ramping production or whatever is less relevant. But delivering on big promises means that the company is finally finding its groove. It sort of proves the business model and the execution, increasing confidence in the stock.


Tesla really looks like it’s going places and finally, investors are showing some love-

Tesla shares carry a Zacks Rank #2 (Buy), similar to peers General Motors (GM - Free Report) and Polaris Industries (PII - Free Report) , or parts suppliers Douglas Dynamics (PLOW - Free Report) and Standard Motor Products (SMP - Free Report) . For better picks, see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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