Did you feel the ground moving beneath your feet? Tesla (NASDAQ:TSLA) shares skyrocketed nearly 22% today after the EV leader released a Q3 report that may not have hit all the sweet spots but delivered where it mattered most – the auto margins.
As for the headline metrics, these were a mixed bag. Revenue climbed by 8% year-over-year to $25 billion, a figure that fell short of the consensus estimate by $490 million. At the other end of the equation, ending a 4-quarter series of missed EPS estimates, adj. EPS of $0.72 beat the Street’s forecast by $0.12.
The big story, however, and the reason behind the stock’s subsequent jump, was down to a comprehensive auto margin beat. While Wall Street anticipated the auto gross profit margins (ex-credits) to land at 14.5%, they hit 17.05%, with the company benefiting from reduced raw material costs and an FSD (full self-driving) feature launch. However, Tesla said such robust margins are unlikely to be a feature moving forward.
Nevertheless, RBC analyst Tom Narayan is impressed with the “eye-watering” margin figure. “We think this highlights how healthy the fundamentals are for Tesla at its core car business,” he explained. “Despite pricing down 8.2% y/y, which boosted deliveries +6.4% y/y in Q3, Car profits were resilient.”
Narayan now expects the focus to shift toward “higher value-added attributes including regulatory credits, energy storage, and most importantly, autonomy.”
Autonomy represents the “key to our Tesla investment thesis,” says Narayan. During the earnings call, management noted that FSD attach rates increased following the October 10 robotaxi event and Narayan reckons they may now be approaching 20%, comparable to the rates seen in lower-priced Level 2+ systems from BMW, GM, Mercedes, and Ford (FSD accounts for 24% of Narayan’s valuation). Regarding robotaxis (which account for 51% of RBC’s valuation), management mentioned that ride-hailing services are already being offered in the Bay Area through a company-developed app. Tesla anticipates that unsupervised FSD will first receive approval in Texas, followed by California, “as early as next year.”
“We continue to believe that the robotaxi ecosystem will have multiple players and that Tesla will be an important part of it,” the analyst summed up.
To this end, Narayan rates Tesla stock an Outperform (i.e. Buy) and upped his price target from $236 to $249. Ironically, with today’s rally, Tesla’s share price has already zoomed about 5% beyond his revised target. (To watch Narayan’s track record, click here)
Other analysts on the Street remain less enthusiastic. The stock claims a Hold (i.e. Neutral) consensus rating, based on a mix of 16 Holds, 11 Buys and 8 Sells. Going by the $207.83 average price target, a year from now, shares will be changing hands for a 20% discount. (See Tesla stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
