TESLA RE-VALUATION UPDATE|Q3 EARNINGS DISSECTION|+ESG INVESTING+The Q3 earnings report was surprise to everyone, kudos to Musk and his team for a job well done . There are still some questions, but it seems that most of the fundamental issues that Tesla had since the start of the year, have been solved.
****Here are the key points from the Q3 earnings report and the revaluation with the addition of ESG factors:
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1. Increase to 22.8% Gross Margin(from 18.9%) and an Operating margin of 4.1%(from -2.6% ). Argument : Improvement in their production line, Tesla's becoming more efficient at producing vehicles. (Ref #2)
2. Large improvement in cash flows, mostly because of cost cutting(15% "magical" drop in expenses) ; at the same time slightly lower revenue. More importantly their investments are having faster payoffs than expected ( China expansion and model Y development, both ahead of schedule).
3. Tesla is becoming more diversified as there are more indications that they're successfully developing their energy storage projects. Revenue from project unrelated to auto sales grew from 368(Q2) to 402 mil(Q3), and will continue to expand in 2020 .(Ref #3)
4. Obviously, since cash flows are better, so is their EBITDA(Q2-371 mil, Q3-876 mil), this is where their good EPS figure came from. Furthermore, there are indications of deferred revenue that will be realized in the following quarters." We also expect to
gradually release nearly $500M of accumulated deferred revenue tied to Autopilot and Full Self Driving features."
5. US EV market seems to be saturated, but there could be an opportunity for more demand to kick in as the current ESG investing trends continue based on the current DIM(Green new deal) momentum . Tesla's European expansion will take time and won't be as profitable as the Asian expansion. Chinese expansion opportunity without a doubt will have a large long-term payoff.(Ref #4)
*** Most importantly: The rest of the market could feed off the Tesla surprise. No doubt, it's been the best and most bullish surprise for the earning season so far. In times of rising recession fears, Tesla doing well as the market leader in a growing EV automarket, definitely is a major benefactor to the sentiment overall .***
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Have to say that I've learn to, not be dependant on wall street analysts when trading highly volatile growth stocks (extension from my previous post). But then again, going off of management's' guidance, they will always have the incentive to manipulate the numbers . It can be said that their bad start of 2019, was an existential threat to Tesla, so Musk and the team got to work. There are still some questions about profitability, but the tricky part is that Tesla's investors are motivated because of ESG factors, not by profitability . Profitability matters less to these type of investors, since the markup in valuation from having a high ESG* score, could improve long-term returns in such investments as Tesla . At these low rates, even if profitability is low, Tesla could keep financing their investments and keep growing with good fundamentals. Additionally, taking their positive ESG score into consideration- the long term looks bullish. I think that more and more portfolio managers will sacrifice potentially higher sharpe ratios in order to acquire stocks with higher ESG scores(some trade-off), as investor preferences continue to change and become more and more adaptive to the increasing popular ESG investing trends. ( Ref #1, great paper on ESG's impact on investing.
This is the update on Tesla post-earnings. Learned my lesson (my bad) , short interest was just too damn high to ignore it pre-earnings.
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*ESG stands for Environmental, Social, Governance.
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References and Disclosure:
1. papers.ssrn.com ( ESG Investing paper, released about a week ago)
2. ir.tesla.com (Q3 Earnings report)
3. hypercharts.co (All the financials)
4. www.youtube.com (Good video on earnings and conference call)
*https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp
Full Disclosure: This is just an opinion, you decide what to do with your own money. For any further references or use of my content for private or corporate purposes- contact me through any of my social media channels.
