Investors shouldn't obsess about a company's progress over just a three-month period, but they still watch quarterly results are still watched closely for good reason. They help detect trends and can confirm or refute what stock analysts have been saying about a business' prospects.
One of the most closely followed stocks is Tesla (TSLA 1.50%), and its third-quarter earnings report comes at a transitional time for the company and the entire electric vehicle (EV) sector. Amidst competition that is ramping up and several other headwinds in the industry, Tesla just gave investors another good reason to think about buying its stock.
More than just a stock split quarter
One of the highlights for shareholders in Tesla's third quarter was the 3-for-1 stock split it completed in August. But that didn't change anything about the business or the company. Investors just found out the details of what did from its quarterly report, however.
After its first quarterly drop in net income in the second quarter, the EV trailblazer rebounded with a near-record third quarter. Tesla's bottom line more than doubled compared to the year-ago period with $3.3 billion in net income. That was just $26 million shy of the record it set in the first quarter of this year.
Data source: Tesla. Chart by author.
Importantly for investors, Tesla generated $3.3 billion in free cash flow -- defined as operating cash flow less capital expenditures -- as it is now reaping the benefits of the growth investments it's been making. That was more than $1 billion more free cash than it generated in the record first quarter.
Addressing the demand question
Business remains robust for Tesla as well. Some investors have worried about demand destruction as EV competition swells globally. But in the conference call for investors, CEO Elon Musk stated, "I can't emphasize enough, we have excellent demand for Q4, and we expect to sell every car that we make for as far in the future as we can see."
That's exactly why the company has spent billions to build its two new manufacturing facilities in Texas and Germany, as well as upgrading its Shanghai plant. That China plant now has the ability to produce 1.1 million vehicles annually at full capacity. It closed in on that run rate with a monthly record 83,135 units in September.
The company has also said its energy division that includes battery storage and solar rooftops has more demand than it can supply. Sales from that division represented 5% of total revenue in the third quarter.
Growth stock valuation
There's no question the company is performing well, even as it faces supply chain and logistics headwinds. The company produced 22,000 more vehicles in the third quarter than it was able to deliver due to shipping bottlenecks. Customers will take ownership of those vehicles in the fourth quarter. That issue could cause 2022 deliveries to miss the company's 50% annual growth target, but it does expect production to still hit that level of growth.
But investors still wonder if the stock is valued appropriately. Its trailing-12-month price-to-earnings (P/E) ratio remains above 60 even as net income has accelerated this year. If the multi-year 50% annual growth level holds, however, that P/E will decline relatively quickly.
Investors shouldn't count on any stock to guarantee a certain return over just one or two years. There are too many outside factors like the current supply chain risks. A visionary leader like Elon Musk has also been aggressive with his predictions. The Tesla Semi truck was first announced nearly five years ago, for example. But that vehicle is now set to begin deliveries next month.
Tesla shares could go lower even after it is down nearly 50% from its highs. But with its promising growth path ahead, long-term investors might want to take advantage of that decline and buy some Tesla stock now.
