Tesla (TSLA) Stock Falls Despite Record Earnings Report

Electric carmaker Tesla, Inc. (TSLA) reported record earnings after the bell on Monday. The company's revenues increased tenfold, and its income crossed the $1 billion threshold for the first time in its history. Impressive figures like these should enthuse Wall Street and push company valuations and stock prices higher.

But Tesla’s share price, which had been inching upwards in anticipation of a record quarter, fell 2% yesterday. That decline is not a one-off instance. The company's stock is down 23% in the past six months. This state of affairs has persisted despite unprecedented regulation favoring electric vehicles and successive quarters of positive earnings reported by the company this year.

Key Takeaways

  • Although Tesla reported record earnings, the electric vehicle maker's share price fell 2% yesterday.
  • Analysts have offered theories to explain the share price decline, stating that the stock is priced for perfection, maturing, or hampered by Tesla's failure to live up to its ambitious promises.
  • However, many analysts remain upbeat about Tesla's long-term story – one about dominating the electric vehicle category.

Here are some theories that are being put forward to explain Tesla’s price decline.

A Perfectly Priced Stock

According to Needham analyst Rajvindra Gill, Tesla's shares are already "priced to perfection." That means any further increase in its price will mean that it is overvalued relative to its business performance. The Palo Alto, California-based company already has an incredible price-to-earnings (P/E) ratio of roughly 647. In contrast, rivals Ford Motor Company (F) and General Motor Company (GM) sport healthier P/E ratios of 13.98 and 8.99, respectively.

Those sky-high investor expectations for Tesla's future earnings will have to meet the dirt road of increased competition and economic turbulence at some point. For example, Tesla's head start in the electric vehicle category is being challenged by an increasing number of competitors, both startups and established companies.

"Tesla's 'priced to perfection' valuation is hard for us to justify even with more positive recent results," Gill wrote in a note. He has assigned an "Underperform" rating to the stock.       

A Maturing Stock

As it hurtled from one milestone to another, the electric car company’s share price became a byword for volatility, moving erratically between highs and lows, based on the company's numerous successes and failures. Analysts followed the stock's price trajectory, paring or raising their valuations.

Part of the reason for the stock's movement was related to the problem of defining a market for Tesla's products. In an industry dominated by gasoline-powered cars, the competitive turf was uneven because Tesla was competing against established car companies with decades of experience and infrastructure for their products. The Biden administration's regulatory pivot toward electric cars has evened out the playing field, pushing Tesla to the leader position.

According to some, the muted reaction to Tesla’s blockbuster earnings is a sign that its stock is maturing. "A small drop in response to better-than-expected results is typical for stocks. Investors always expect companies to exceed analyst projections, and when they get that result, they "sell the news," writes Al Root at Barron's. If his theory turns out to be correct, then it means that Tesla bulls hankering for double-digit gains in the company's earnings calls are in for a disappointment.

Failed Promises

Tesla CEO Elon Musk has a history of overpromising and under-delivering. Monday's earnings call was no different. The company delayed launch of the Tesla Semitrailer, originally planned for 2019, yet again. There was no word on the Cybertruck, which Musk recently said could be a failure in the market. The company's advanced driving technology is still not ready, and updates on its promised battery cell, which is supposed to solve its supply chain problems with procuring batteries and help develop a $25,000 electric car, were absent.

Analyst Gordon Johnson of GLJ Research is not buying Tesla's promises. "Even though the earnings were good, they didn't in any way justify the multiples the shares are at," he told CNN Business. "Musk's grandiose promises are the reason for these multiples. To own or buy the stock, you have to believe it's in the lead in batteries and in the lead in full self-driving. Yesterday went a long way to undo the air of invincibility around the company."

Persistent Bulls

It should be noted, however, that Tesla bears have a match in the company's bulls. Most analysts have a positive rating for the stock and maintain that its long-term story – one about dominating the electric vehicle category – remains intact. For example, Dan Ives, tech analyst at Wedbush Securities, has maintained a $1,000 price target for the stock. "We view this (the price decline) as temporary overhang for the stock," he told CNN Business. "It was too utopian to think they're not going to have some speed bumps on their way [to] reaching the holy grail."

Adam Jonas of Morgan Stanley has been a Tesla bull for several years now. "Tesla is not only among the fastest growing auto companies in the world, it is also one of the most profitable," he wrote after the earnings call. Bank of America's John Murphy, who has a $750 price target on Tesla, wrote that its high stock price is justified as long it can access capital with "little to no cost" to fund its ambitions.

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