Tesla: The Good, The Bad And The Bottom Line

Tesla Motors Inc TSLA reported its Q3 results, with better than expected gross margins.

Barclays’ Brian Johnson maintained an Underweight rating on the company, with a price target of $165.

The Good

Johnson mentioned that even excluding Zero-Emission Vehicles (ZEV) credits, gross margin was up 140 bps sequentially, 25 percent, beating the estimate and the buyside expectations.

“While Tesla likely reaped some margin benefit from the new accounting treatment, Tesla benefited from increased production and greater efficiencies - especially within Model X,” the analyst stated.

According to the Barclays report, the margin boost came despite higher discounting and lower end mix on Model S, and while there continued to be risks to Tesla’s production ramp, the Q3 results reinforced the view that the company “will still find ways to manage kaizen ('continuous improvement') in its production.”

The Bad

“The negative in 3Q was the push to drive an optically strong result. ZEV credits were $139mn, the highest quarterly level ever, and drove the majority of the EPS beat,” Johnson noted, while adding that without this large increase, the company would have been breakeven.

In addition, while the cash burn was meaningfully lower than expected, driven to a large extent by one-time items.

The Bottom Line

“We continue to see the stock as fundamentally overvalued. However, the next month could be positive for the stock given a number of catalysts,” the analyst added.

Johnson believes momentum could start to shift with Tesla expected to undertake a capital raise in Q4, along with expectations of delays associated with Model 3.