Tesla stock climbed in after-market trading on Wednesday after the company beat revenue forecasts in the fourth quarter and notched its first-ever back-to-back net profit, helping to justify an extraordinary rally that has seen its shares more than double in a matter of months.
The electric car pioneer said fourth-quarter revenues rose to $7.4bn, up just 2 per cent from a year ago but well ahead of Wall Street expectations of $7bn. A year ago it reported $7.2bn in revenue.
Its net profit was $105m, down 25 per cent from a year ago but the second straight quarterly net profit in a row — heartening for investors looking for confirmation that chief executive Elon Musk has built an electric car company that will sustainably deliver earnings.
Tesla called 2019 “a turning point” for the company, in which it demonstrated organic demand and “strong cash generation through persistent cost control across the business”.
By mid-2020 it expects that its flagship production plant in Fremont, California, will have capacity to build 500,000 units a year, whereas in 2019 it churned out 365,300 vehicles.
Before the earnings Tesla’s stock had soared 128 per cent since late October when it stunned Wall Street with a quarterly profit and bullish outlook. It added another 12 per cent in after-hours trading to $648.76 on Wednesday, valuing the company at $117bn.
Amid the stock market euphoria Tesla’s finance chief Zachary Kirkhorn issued a few notes of caution for March quarter earnings.
“We are in the process of ramping [up] two major products — the Model 3 in Shanghai and the Model Y in Fremont — which I expect will temporarily weigh on our margin,” he said.
He added that ramping up production in Shanghai will be delayed by up to a week and a half because of “a government required shutdown” related to the coronavirus.
“This might slightly impact profitability for the quarter,” Mr Kirkhorn said, adding: “We are also closely monitoring whether there’ll be interruptions in the supply chain for cars built in Fremont.”
Nevertheless, Tesla said production of its Model Y crossover utility vehicle began “ahead of schedule” this month and that some customers will receive their vehicles in March. Together with the Model 3 the Fremont factory currently has capacity to build 400,000 vehicles a year.
A negative for the company in the report was that automotive gross margins fell 1.13 percentage points from a year ago to 18.8 per cent.
Tesla said it will “ultimately reach an industry-leading operating margin” as it scales up volume of the Model Y and drives up production from its new factory in Shanghai.
Longer-term, Mr Musk said Tesla hopes to achieve unheard of margins not from scaling up — the traditional trick in generating automotive profits — but from selling customers self-driving software packages. “And as we get closer to full self-driving, that’s just going to come more and more compelling,” he said. “From a financial standpoint that’s the real mind-blowing situation — high volume, high margin, because of autonomy.”
If Tesla could pull that off, it would effectively redefine a key tenet of the auto industry. It has already altered the trajectory of what today’s incumbents are working on, by producing the first mass-scale electric cars and equipping them with over-the-air software updates.
Compelling as that vision may be, however, some observers want Mr Musk to curb his future ambitions and focus on the present to make 2020 Tesla’s first profitable year.
“The opportunity right now is to build up the EV market and service the existing cars in the fleet,” said Alyssa Altman, transportation lead at Publicis Sapient, a consultancy.
She said Tesla looked over-valued last summer, but then Mr Musk listened to Wall Street and prioritised cutting costs and focusing on building cars. “I feel very good about the outlook,” she said. “[But only] if he doesn’t try too many things at once.”
Tesla had already revealed earlier this month that production in the December quarter had surged 22 per cent to a record 105,000 vehicles, led by about 87,000 of its lower-priced Model 3 vehicles. Deliveries in the quarter totalled 112,000. That news propelled Tesla’s stock to a new high of $445.21 on January 2, and since then the stock has soared further to a new high on Wednesday of $580.99.
Analysts at Wedbush, which last week raised its share price target for Tesla from $370 to $550, said before the report that Tesla’s China opportunity alone was “worth at least $100 per share”.
But the sky-high valuation continues to divide investors and analysts. “For all the progress Tesla has made, it’s impossible not to question its valuation,” said Nicholas Hyett, analyst at Hargreaves Lansdown.
“It has a fantastic brand, formidable manufacturing capabilities and a fabulous product. But is it really worth more than Volkswagen — a company which manufactured 10.8m vehicles in 2018 to Tesla’s 365,000 in 2019, and posted profits after tax of €12.2bn to Tesla’s $775m loss?,” he asked. “Betting against Elon Musk has been a mistake in the past, but we’re still not sure.”