Graniteshares commentary on Tesla

GraniteShares : On Wednesday 22nd July, Tesla reported a second-quarter GAAP profit of 50 cents per share versus analysts’ consensus expectations of a loss of $1.06, pushing its share price higher in the after market and setting it on a course to join the S&P 500 index …

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The company earned a profit of $104 million during the quarter, compared to a loss of $408 million for the same quarter a year ago.  Looking to the future, Elon Musk commented, “We want to be like slightly profitable and maximise growth and make the cars as affordable as possible, and that’s what we’re trying to achieve.”

The Tesla share price has outperformed the industry over the past year, and there are several factors behind this.

It’s a market leader in the fast growth electric vehicle market, has a good range of vehicles, and superior technology.  It is also ramping up production and has product launches planned that should bode well for the future.

However, it is not all plain sailing for Tesla.  To maintain its advantage, it has high running costs and must spend heavily on R&D, all of which impacts on the bottom line and margins.  This is particularly true now as it is investing heavily to increase production capacity and boost sales.

Tesla also has a large amount of debt that could adversely affect the performance of the share price.

There is a strong case to both buy and sell Tesla.  From a buying perspective, it has got its factory in Shanghai operational, is increasing production, has its new Model Y vehicle and plans to launch new models.  It has a substantial market share of the electric vehicle market and revenues should increase in the short-term.

The company is making good progress in increasing its deliveries, which should deliver cost savings and improved levels of efficiency, strengthening margins. Tesla also has energy generation and storage revenues, which are enhancing its prospects.

In terms of the risks of buying Tesla, the obvious ones are its high leverage along with significant R&D and capex costs. It is also facing growing competition.  Competitor NIO has seen its share price rocket and it has secured new funding through several companies lead by China’s central government.  It now has a market capitalisation of $16 billion.  Another competitor is BYD (Build Your Dreams), 24.6% of which is owned by Warren Buffet’s Berkshire Hathaway.

However, overall, Tesla shares have outperformed other major tech and auto stocks since it went public some 10 years ago.  It has had plenty of highs and lows, including a 30% drop in the share price when CEO Elon Musk announced he had secured funding to take the company private. For those who invested early, the returns have been extraordinary:  it IPOed on 29 June 2010 at $17 and closed at $1,568.38 on 21 July, a rise of over 330% from its March 2020 low.

Tesla has is the Marmite of stocks, split between those who love the company and CEO for being at the forefront of technological disruption in the automotive sector, and those who believe it is over-hyped and set for a reality check and fall in value.


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