Tesla's Valuation Still 'Appears Overcharged' Following Q2 Earnings

Tesla Inc TSLA reported a second-quarter earnings beat on Wednesday afternoon. Adjusted EPS of $2.18 on revenue of $6.04 billion both exceeded consensus analyst estimates of 3 cents and $5.37 billion, respectively.

Perhaps more importantly, Tesla’s GAAP EPS of 50 cents makes the company eligible for inclusion in the S&P 500 index. The company also announced its next gigafactory will be in Austin, Texas.

Tesla’s earnings beat was helped by $428 million in regulatory credit sales up more than 200% from a year ago. Despite the launch of the Model Y and the opening of a new plant in Shanghai, Tesla’s automotive sales were down 4% compared to a year ago.

Stock Fully Valued: Morgan Stanley analyst Adam Jonas said bears would really need to “nit pick” at Tesla’s numbers to put together a negative case, but Tesla’s $300 billion valuation is already discounting multiple years of strong growth.

“Our long-term concerns around sustainability of profit in China, poor auto industry fundamentals,and what we believe to be inevitable competition in EVs and AVs from a host of well capitalized tech firms (AMZN, AAPL, GOOGL,etc.) and OEMs are just not seen by the market as a big enough part of the narrative and the risks are underappreciated by the market,” Jonas wrote in a note.

Bank of America analyst John Murphy said Tesla deserves credit for its progress, but the stock’s “valuation appears overcharged” after rallying 546% in the past year.

“In fact, we view the upward spiral of TSLA stock as more driven by the stock itself rather than fundamentals, as the higher the stock goes, the cheaper funding gets to support outsized growth, which is then rewarded by investors in the form of a higher stock price,” Murphy wrote.

See Also: ARK Invest Analyst Discusses Tesla's Path To $15,000 Share Price

Accounting Games: GLJ Research analyst Gordon Johnson said Tesla appears to be playing “accounting games” to turn a profit.

“We believe TSLA recognized regulatory credit revenue on cars it may not yet have sold to people who have not yet paid for them (i.e., deceptive accounting),” Johnson wrote.

CFRA analyst Garrett Nelson said Tesla’s free cash flow dropped 32% from a year ago, but its capex of $546 million was its highest in two years.

“While TSLA once again managed to pull a rabbit out of the hat for earnings, we believe its share price has become decoupled from underlying fundamentals and see growing risks surrounding the story as shares increasingly appear priced to perfection,” Nelson wrote.

Needham analyst Rajvindra Gill said Tesla’s earnings and deliveries beats were impressive, but negative revenue and free cash flow growth are troubling and 100%-margin regulatory credit sales are the primary factor supporting Tesla’s margins.

“Auto revenue declined 4% Y/Y and has been in a downward trajectory since peaking in 4Q19, mainly driven by lower ASPs, in our view,” Gill wrote.

Long-Term Opportunity: Loup Ventures' Gene Munster said Tesla is following the playbook of Amazon.com, Inc. AMZN.

“We believe the most important takeaway is that Tesla is following Amazon’s playbook: building a virtuous cycle of reinvesting profits to drive growth, scale, and innovation,” Munster wrote.

Wedbush analyst Daniel Ives said the report was a home run for Tesla, driven in large part by China.

“China appeared to be the star of the show and was a major source of strength in 2Q based on our analysis and industry data with robust momentum into 2H and 2021,” Ives wrote.

TSLA Ratings And Price Targets:

• CFRA has a Sell rating and $1,220 target.
• Bank of America has an Underperform rating and $800 target.
• Morgan Stanley has an Underweight rating and $740 target.
• GLJ Research has a Sell rating and $87 target.
• Needham has an Underperform rating.
• Wedbush has a Neutral rating and $1,800 target.

Tesla's stock traded around $1,540 per share at time of publication.