Despite already posting year-to-date gains of some 260%, compared to flattish returns for the S&P 500 index, one prominent Wall Street analyst recently outlined a scenario where Tesla (TSLA) stock can reach $2,000, thereby producing additional premium of 33%.
The luxury electric car manufacturer will report second quarter fiscal 2020 earnings results after the closing bell Wednesday. Tesla’s stock outperformance compared to the S&P 500 is notable heading into this quarter. Not the least of which has to do with the fact that the ten-year old company can finally qualify for inclusion in the S&P 500 Index. That is, if Tesla can deliver a GAAP profit for the quarter — which would be its fourth straight profitable quarter, thereby fulfilling requirement for inclusion.
Inclusion into the S&P 500 would allow several large institutional, who weren’t permitted to buy Tesla, to now add the stock to their portfolios. But Wall Street is expecting the company to deliver a loss for the quarter, albeit a narrower loss than a year ago. The company’s strong stock surge has been driven by its impressive second quarter delivery totals for its flagship vehicles which not only suggests strong product demand but also that Tesla revenue suffered little-to-no impact during the pandemic, especially at a time when rival Ford (F) and General Motors (GM) are seeing declines.
Tesla has benefited from its nimbler business model than its Detroit rivals to weather the coronavirus-induced economic destruction. This, in effect, strengthens Tesla’s lead in electric vehicles in the quarters and years head, making Tesla a “must own stock,” according to some analysts. But for the stock to keep rising in the immediate term, Tesla not only must race past its top- and bottom-line estimates, it must surprise the street with that elusive fourth straight GAAP profit.
In the three months that ended June, Wall Street expects Tesla to report a per-share loss of 28 cents on revenue of $5.31 billion. This compares to the year-ago quarter when the loss came to $1.12 per share on revenue of $6.35 billion. For the full year, ending in December, the company is expected to earn $4.43 per share, compared to earnings of 20 cents a year ago, while full-year revenue of $27.4 billion would rise 11% year over year.
The fact that Tesla crushed its Q2 delivery totals in such a robust fashion suggests the Street’s quarterly forecast might be equally too conservative. Recall Q2 quarter deliveries came to 90,650 vehicles, racing past Wall Street expectations of 72,000 vehicles for a 30% beat. To be sure, the bears are quick to point out that delivery totals doesn’t always equate to major profits. While that’s true, Tesla’s management has heighten its focus on profitability and efficiencies in the past three quarters - a trend that should continue to work in Tesla’s favor.
In the first quarter, the company’s automotive gross margin came in at 25.5% of revenue, topping both Q4’s 22.5% and the 20.2% margin achieved in the same period a year ago. Assuming the company can achieve similar gross margins in Q2, combined with improves cash burn rate, Tesla would have likely done enough to deliver another GAAP profit, thus qualifying for S&P 500 inclusion. As to how the stock reacts? That’s another matter.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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