Morningstar

Tesla Posts a 1Q Profit for the First Time

We are increasing our fair value estimate to $731 from $239. If a recession can’t stop Tesla then virtually nothing will, and we expect the company to remain a leader in autonomous technology and range.

Securities In This Article
Tesla Inc
(TSLA)

Tesla TSLA reported a record first quarter, and we calculate adjusted diluted EPS of $1.14 compared with first-quarter 2019 EPS of negative $2.90. We expect large upward stock moves for Tesla in May as results crushed the Refinitiv EPS consensus of a loss of $0.36. We also expect second quarter will suffer from the firm’s main plant in California being shutdown since late March, but once COVID-19 restrictions are lifted, we expect Tesla to fill a large number of orders which are still coming in online. We understand given COVID-19 uncertainty that management cannot give 2020 delivery guidance, but we like that Tesla continues to invest without slowing as evidenced by the Shanghai Model Y plant and Gigafactory Berlin both due to start production next year.

We regret nearly halving our fair value estimate on March 18, partly based on a higher weighted average cost of capital due to Tesla’s 2025 bond yield exceeding 10%, because, in hindsight, that is the same time the bond yield peaked. Even a pandemic causes no fear for the market with this stock, and we're lowering our WACC to about 8.8% from 12%. We're also raising our midcycle operating margin back to 11% and raising deliveries over our 10-year forecast period because we think Tesla will continue to provide formidable competition to premium automakers and have a million units of capacity by the end of 2021. These changes mean we are increasing our fair value estimate to about $731 from $239. If a recession can’t stop Tesla then virtually nothing will, and we expect the company to remain a leader in autonomous technology and range. Tesla is also gaining scale and its ability to make desirable vehicles while generating free cash flow and net profit is far better than it’s ever been. For the quarter, free cash flow was negative $895 million but this was mostly for inventory increases which we expect will become a free cash flow benefit once vehicles being held at the end of first quarter get delivered next quarter.

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About the Author

David Whiston, CFA, CPA, CFE

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist, AM Industrials, for Morningstar*. He covers stocks in the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007. He writes stock reports, ad hoc reports, stock analyst notes, and builds discounted cash flow models for each company covered. He also assesses their economic moat and makes frequent television and print media appearances in local, national, and international news outlets. Key stocks covered include GM, Ford, CarMax, and all six publicly traded franchise auto dealers, such as AutoNation and Penske Automotive Group.

Before joining Morningstar in 2007, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence, gaining experience around assessing an asset’s cash flow.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond’s Robins School of Business. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner.

In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011 .

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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