Tesla finally justifies its year-ago valuation

Tesla Inc CEO Elon Musk dances onstage during a delivery event for Tesla China-made Model 3 cars in Shanghai, China January 7, 2020

MELBOURNE, April 27 (Reuters Breakingviews) - Time was when poor sales of Tesla’s (TSLA.O) high-margin vehicles prompted fears of a big loss. Not so on Monday, when Elon Musk’ electric-car maker unveiled record first-quarter earnings of $1.1 billion, excluding stock-compensation costs. That’s despite problems upgrading its S and X models resulting in just 2,000 of them being delivered, 89% fewer than the previous quarter. Tesla’s decent showing puts in the position of finally justifying its stock-market valuation – for a year ago, that is.

All in, Tesla is purring along well. Overall deliveries almost hit 185,000 cars in the first quarter, more than double the same period last year. Factories under construction in Austin, Texas and just outside the German capital of Berlin will increase capacity further. Investment is up, too: Research and development costs, long kept low while the company struggled to make money, roughly doubled from the end of March last year to a hopefully not symbolic $666 million.

Moreover, Musk appears to be getting a handle on costs. These rose 70% in the first quarter compared to the same period last year, slower than the 74% jump in revenue. That gap would have been wider absent the big drop in sales of the more profitable S & X marques. Thanks mostly to multiple stock sales last year, the company also has, at $17 billion, pots of cash on hand.

Put it all together and a valuation in the region of $140 billion hardly looks a stretch anymore. Granted, at 5.7% last quarter’s operating margin is only in the middle of the pack of more traditional carmakers like Ford Motor (F.N) and Toyota Motor (7203.T), which each make several million vehicles a year. But Tesla is growing fast and is further advanced on both battery and self-driving technology. So ascribing a multiple of 30 times this year’s estimated earnings of $4.8 billion, per Refinitiv, would be defensible.

Trouble is, that was what Tesla was worth 12 months ago. Since then, shareholders have amped up the company’s market capitalisation fivefold to around $700 billion – almost 150 times earnings. Perhaps Musk can grow into that, too. The uptake of both electric and autonomous vehicles needed to get there makes for a much harder trip.

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- Tesla on April 26 reported first-quarter net income of $438 million. Earnings of 39 cents a share compared with the mean estimate of sell-side analysts of 47 cents, according to Refinitiv data.

- Excluding stock-based compensation, earnings were 93 cents a share, or $1.1 billion, compared with the mean estimate of 79 cents a share. Revenue of almost $10.4 billion was just ahead of the estimated $10.3 billion.

- Tesla had $17.1 billion of cash available, a $2.2 billion drop from the previous quarter. The reduction was roughly equally split between Tesla’s purchases of bitcoin and paying back some debt and leases.

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