Tesla delivers massive boost to lucky shareholders

Reaction to results published overnight has put a rocket under the popular tech share.

Elon Musk has given Tesla (NASDAQ:TSLA) fans more reason for cheer after the world's second-most-valuable car maker produced figures in keeping with a remarkable turnaround in fortunes.

The Nasdaq-listed stock surged 13% in pre-market dealings to trade above $648 as Musk — Tesla's co-founder and CEO — revealed the company's second consecutive quarterly profit and forecast in excess of 500,000 deliveries this year. At that price, the stock is now up 55% in 2020 and around 270% since last summer’s low at $177. 

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Analysts at Morgan Stanley said Tesla's fourth-quarter results contained nothing for the company's doubters to seize upon, adding that potential investors were now more likely to see Tesla in a new light as a profitable and cash generative tech company.

This change in perception has been reflected in a meteoric rise for Tesla shares since the electric car maker reported a surprise profit of $143 million in third quarter results in October, when the stock was changing hands at $255.

Source: TradingView Past performance is not a guide to future performance

Plenty of interactive investor clients have benefited from the subsequent turnaround, given that Tesla was our most-bought US stock in 2019 and has continued to be popular in the first month of 2020. Exposure for UK investors also comes through the blue-chip-listed investment vehicle Scottish Mortgage (LSE:SMT), which is one of the US company's biggest shareholders. 

Tesla's surge, which has proved costly for the short-sellers holding about 15% of the stock, last week took it over the $100 billion market cap threshold to value the business at more than General Motors (NYSE:GM) ($49.9 billion) and Ford Motor (NYSE:F) ($36.3 billion) combined. It has also overtaken Frankfurt-listed Volkswagen (XETRA:VOW3) in market size but remains a long way off the world's biggest car maker, Toyota Motor (NYSE:TM).

The comparison with Volkswagen is particularly interesting for investors, given that Tesla's production was a mere 5% of the German car giant's worldwide deliveries of 10.97 million vehicles in 2019. VW also reported strong growth in sales of electric vehicles of 80%, but this still only amounted to 140,000 vehicles in the period.

As last night's results show, Tesla still has the march over more established car makers in terms of the technology and capabilities for developing next generation vehicles. Analysts are currently pricing in that Tesla will produce around 1.6 million vehicles a year by 2025.

Tesla's Model Y utility vehicle is being built earlier than expected, with the first cars now due by the end of March. Together with Model 3, this should give Tesla's Fremont facility an annual production capacity of about 500,000 units by the middle of 2020.

The opening of a new $2 billion factory in Shanghai is expected to add output of 250,000 vehicles a year, while the first deliveries from Berlin are scheduled the following year.

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Despite the burden of these developments, free cash flow of $1 billion was particularly impressive in the three months to the end of 2019. The operating margin came in at 4.9%, compared with a negative 11.5% at the start of the financial year.

Profits for the quarter were $105 million, although the company still reported a loss of $862 million for the year as a whole. It expects further progress in profitability going forward, with possible temporary exceptions, particularly around the launch and ramp of new products.

Morgan Stanley said the bull case for shares looked to be $650, whereas UBS has a price target of $410 based on its view last week that shares had “already left the orbit”. They warned then that risks in execution and US demand following the phase-out of electrical vehicle tax credits were being ignored. “We think shares are over-shooting right now,” UBS added.