Electric-car maker Tesla (TSLA -3.40%) crashed by nearly 14.5% on Wednesday after reporting earnings the day before. Tesla is a volatile stock and a risky investment, but nothing has materially changed in terms of the company's long term prospects. The latest earnings release is no reason to change your mind about Tesla.
The numbers
Considering the exacerbated market reaction to the report, investors could think that Tesla delivered some really lousy results on Tuesday. But that's not the case -- far from it. The company continues executing remarkably well, and the long-term growth story is still pretty much intact.
Tesla reported a 9% year-over-year increase in revenue to $603 million, and sold 5,500 vehicles during the quarter... not bad at all when compared against the company's guidance of "slightly over 5,000". Some Wall Street analysts had gotten ahead of themselves with crazy optimistic estimates for sales based on VIN numbers, but overly optimistic Wall Street forecasts are not something the company can control.
Non-GAAP earnings per share of $0.12 were above the average Wall Street estimate of $0.11 per share, and margins were also strong. Gross margin was 21.5% excluding ZEV credits, a material improvement over 14% in the last quarter, and showing that Tesla is on the right track to achieving its goal of 25% in gross margin for the next quarter.
Guidance for the next quarter was "slightly under 600 units", which may come as a disappointment for some analysts, but investors need to consider that the company is consistently reporting sales numbers above its own guidance over the last quarters.
There is a considerable chance that management is being conservative when it comes to guidance, likely in order to leave some room in case production doesn't go as expected. In any case, the company increased guidance for the full year by 500 units to 21,500, so things don't look bad enough to justify a 14.5% drop in a single day.
Overcharged expectations
Trying to explain short-term reactions to earnings announcements can be a tricky game, especially in a highly volatile company like Tesla. One thing looks quite clear though: The stock was up by more than 460% in the 12 months leading to the report, so price performance was reflecting some very optimistic expectations.
Even CEO Elon Musk has recently gone public stating that the market has assigned Tesla a "very generous" valuation and giving the company a lot of credit on future execution. CEOs don't usually say things like that, and Musk is clearly optimistic about Tesla when it comes to the company's long-term future, so there are some compelling reasons to believe expectations about the company were quite overcharged leading to the report.
Maybe guidance for the next quarter was not as strong as some expected, but Tesla still delivered some really solid numbers, and the company is on track to achieve its long term targets. The real problem was not the earnings report, but the exaggeratedly optimistic expectations regarding the company in the previous weeks.
Tesla continues moving in the right direction, and the numbers were actually quite good. If some Wall Street analysts and investors felt disappointed by the report, that has more to do with their own expectations than with the company's performance.
The road ahead
Even after the recent pullback, Tesla is trading at a forward P/E above 88, so the company is still priced for some seriously big growth. Musk and his team have proven time and again that they can deliver, but that doesn't mean there won't be any bumps in the road.
Battery shortage is a big concern for Tesla when it comes to production capacity, and Musk announced during the conference call that the company is planning to build a "giga-factory" to produce as much supply of lithium ion cells as current world production, that can provide an idea about the size of the challenges ahead. Building and expanding the supercharger station network is no easy task, and certainly not a cheap endeavor either.
But at the end of the day, demand continues outgrowing production supply for Tesla, a problem most companies in the world would envy. The company is still moving in the right direction, and nothing in the last earnings report indicates otherwise.
Bottom line
The main reason behind Tesla's recently collapsing price has to do with overly optimistic expectations prior to the earnings report, not with the march of the business. The long-term growth story is still intact, and the company continues moving forward. Tesla is still priced for growth but, if you liked the company before the drop, maybe you should like it even more at cheaper prices.
