ii view: Tesla shares surge given a surprise profit

A return to profit and record cash. Should investors still be kicking the tyres at Tesla?

Third-quarter results

• Automotive revenue down 12% to $5.3 billion
• Net profit down 54% to $143 million
• $5.3 billion of cash and cash equivalents

ii round-up:

Electric vehicle maker Tesla Inc (NASDAQ:TSLA) reported a surprise profit of $143 million in these third-quarter results. 

In contrast to analyst expectation for it to add to the $1.1 billion of first-half losses, cost control and the lowest operating expenses since its famed Model 3 car commenced production, helped drive a return to profit and a 15% plus share price gain in after-hours US market trading. 

Quarter end cash and cash equivalents increased to $5.3 billion, driven by positive free cash flow of $371 million, although revenues, impacted by a tripling in consumer leasing year-over-year, missed analyst estimates. 

The company, founded in 2003, achieved record production of 96,155 vehicles during the quarter and record deliveries of approximately 97,000 vehicles. 

Management flagged a dramatic improvement in the pace of execution and capital efficiency of its new production lines. Gigafactory Shanghai was built in 10 months and is ready for production, while it was 65% less expensive to build than its Model 3 production system in the US.

ii view:

Further record deliveries of vehicles and record production prove that the company is making progress. A surprise return to profitability and an end to the quarter with record cash of $5.3 billion offer significant comfort. 

Accompanying group third-quarter outlook comments also added to the comforting tone from management.  Trial production of the Model 3 in Shanghai has begun ahead of schedule and it is ahead of plans to produce its Model Y vehicle. 

For investors, the boost to confidence and the share price will be highly welcomed. Tesla is clearly reshaping the automobile industry, with rivals such as Ford Motor Co (NYSE:F) and Volkswagen AG (XETRA:VOW) playing catch up. But with management flagging likely returns to periods of losses upon new product launches and consumers still yet to fully embrace electric given the lack of charging infrastructure, there is still much to play for. 

Positives: 

• A return to profit
• Climate change concerns are arguably growing globally
• Morgan Stanley has speculated about a spin out of its self-drive business

Negatives:

• Competition from other manufacturers is increasing
• CEO Elon Musk has previously come to the attention of the SEC due to tweets
• No current dividend payment

The average rating of stock market analysts:

Hold