Tesla Gains on Musk Optimism About Overcoming Supply Issues

(Bloomberg) -- Tesla Inc. shares rose, erasing their decline for the year, after the carmaker reported better-than-expected earnings and Elon Musk predicted production will grow at a fast clip for the rest of 2022 despite supply chain challenges.

The first major U.S. automaker to report financial results for the first three months handily beat estimates with a record quarterly profit. While Tesla cautioned that it remains constrained by shortages of materials and components -- a common refrain for automakers plagued by bottlenecks of parts such as semiconductors -- its ability to overcome obstacles is setting itself apart. 

“The more we see out of Tesla, the more we are concerned about the rest of the industry’s ability to play catch-up,” Morgan Stanley analyst Adam Jonas wrote in a note.

Tesla shares surged 11% at 9:42 a.m. Thursday in New York. The stock had been down 7.5% year-to-date through Wednesday’s close.

Musk, Tesla’s chief executive officer, said the company should be able to make up for any production losses in the first half of the year from coronavirus-related shutdowns at its factory in Shanghai. He said Tesla is on track to expand production to more than 1.5 million vehicles this year, implying more than 60% growth.

“We may pull a rabbit out of the hat,” Musk said during an earnings call, adding that he expects production in the third and fourth quarters will be “substantially higher.”

Earnings excluding some items jumped to $3.22 a share in the first quarter, Tesla said in its shareholder deck, beating analysts’ average estimate for $2.27 a share. Revenue soared 81% to $18.8 billion, also topping projections.

Tesla got a revenue boost from regulatory credits totaling $679 million, more than double the amount generated during the previous quarter. Chief Financial Officer Zach Kirkhorn said the gain was mostly due to a one-time $288 million benefit from stiffer U.S. emissions penalties.

“Credit revenue would have declined compared to the period last year” without that change, Kirkhorn told analysts.

Tesla has repeatedly said it expects credit revenue to shrink over time as automakers launch more EVs to comply with emissions regulations and meet growing demand. But car companies’ early electric models have been unable to replicate the success of the Model 3 sedan and Model Y sport utility vehicle.

“It speaks to where the rest of the auto industry is when it comes to selling EVs in high volumes,” said Gene Munster, managing partner of Loup Ventures. “They are still behind.”

While Tesla is by far the world’s most valuable auto company, with a $1 trillion market capitalization, its shares have dipped this year amid concerns about global shortages of key parts. The stock has still fared better than bigger-volume rivals including General Motors Co. and Ford Motor Co., whose shares are down 29% and 23%, respectively.

Quarterly Profit

Increased sales of higher-margin vehicles and cost cuts helped Tesla improve its automotive gross margin to 32.9%. Dan Levy, a Credit Suisse analyst with the equivalent of a buy rating on the stock, said Tesla’s higher returns were a “positive surprise” that bodes well for its ability to keep costs in check and drive sales.

“The cost improvement is critical, as we believe Tesla will ultimately use cost improvements to fund lower-priced vehicles,” he wrote in a research note.

Tesla ended the quarter with more than $18 billion in cash and equivalents. It’s now carrying just $88 million of debt on its balance sheet, excluding vehicle and energy product financing.

The global EV market leader is expanding on three continents, with new factories in Austin, Texas, and near Berlin supplementing existing plants in California and Shanghai. Those facilities are expected to help the company meet or exceed its stated goal to grow 50% on average annually.

No Bombshells

Musk refrained from dropping any bombshells on the call and wasn’t asked about how he plans to finance his $43 billion bid for Twitter Inc., a subject of much speculation since his unsolicited offer for the social media company.

Tesla has long talked about having the ability to turn its customers’ cars into driverless vehicles that could be used as robotaxis. But the company is now working on a new, dedicated robotaxi model -- with no steering wheel or pedals -- that Musk first hinted at earlier this month.

The CEO vowed to unveil the car in the next two years and begin volume production in 2024.

(Updates trading in fourth paragraph.)

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