Bull of the Day: Tesla (TSLA)

A lot of things seem to be going Elon Musk’s way lately. His recent victory in a defamation lawsuit filed against him by a rescue diver that he insulted on Twitter was a personal matter and really had nothing to do with his role as CEO of today’s Bull of the Day – Tesla (TSLA), but he was able to seamlessly blend his personal and public personas recently when he drove a prototype of Tesla’s upcoming CyberTruck out to dinner at a hip LA restaurant.

As the old adage goes: "Any press is good press."

For a company that spends exactly zero on advertising, Tesla gets a great deal of free publicity, largely from the exploits of its charismatic leader. Getting extensive paparazzi coverage while celebrities fawn over your latest innovation is the kind of free advertising that ordinary companies can only dream of.

Even when the attention has a negative aspect – like the infamous broken windows on the CyberTruck at its unveiling in November – it splashes Tesla’s name and product images all over the news. The window issue will certainly be remedied (probably to an extreme degree, knowing Musk), but the extensive media coverage was simply more free advertising.

Isolated – and some would argue, inevitable – accidents involving Tesla vehicles being operated in auto-pilot mode even end up bolstering the company’s reputation. It’s all in the spin. Those news stories make the public aware just how close Tesla is getting to true autonomous driving.

It’s more than free advertising that’s going right for Tesla lately, however. Impressive sales of existing products, aggressive expansion efforts that will allow the company to manufacture and sell its autos and batteries in Europe and Asia and a stable of exciting future products have made Tesla one of the hottest stocks of 2019, with the shares nearly doubling in price since the beginning of June.

The rally was already developing when Tesla turned in a blowout Q3 earnings report in October. Expected to post a modest loss of ($0.15)/share for the quarter, Tesla instead posted a positive net of $1.86/share on $6.3B in revenue.

The company reported capital expenditures of $385 million during the quarter, down from $510M in the third quarter of 2018. Free cash flow was $371 million and cash and equivalents on the balance sheet grew to $5.3 billion, largely extinguishing fears that the company would have to tap the debt markets at unfavorable rates or engage in a dilutive equity offering to raise the cash to fund near-term operations.

There was a lot more to like in the investor presentation following the earnings release. Tesla sold 97,000 cars in the Q3, displaying still-strong demand for its most affordable variant – the Model 3. That car now starts at a retail price of just $39,500, which is a bit higher than the $35K selling price that the company targeted when the project was unveiled in 2016, but still well within the reach of the average new car customer.

Musk reiterated that Tesla is on track to deliver close to 400,000 vehicles in 2019, which is still far fewer than huge manufacturers like Ford – which sold 2.5M cars in 2018 – but still signifies that Tesla has evolved from a niche automaker to a true mass-market brand.

That Tesla sales number also promises to keep growing. Only 600,000 of Ford’s sales were passenger cars, while 867K were SUVs and 1.12M were pickup trucks – two categories at which Tesla is taking dead aim. Musk reported that the company would begin selling the affordable Model Y SUV in the summer of 2020 – 6 months sooner than previously expected, and at better gross margins than existing models.

The recent debut of the CyberTruck prototype promises an all-electric full size competitor to the best-selling Ford F-150 that will be in production by late 2021. Tesla received 250,000 pre-orders for the truck during the first weekend after the unveiling event, 41% of which were for the high end tri-motor variant that’s expected to sell for almost $70K. The more basic single-motor rear-wheel drive truck will start at $39K.

The Bull of the Day is generally a Zacks #1 Rank (Strong Buy) stock and Tesla is currently a Zacks Rank #2 (Buy). That rank has recently come up after a slew of analyst upgrades and positive earnings revisions. Since the Q3 report, the consensus estimate for Q4 rose from ($0.28) to $0.90/share, full-year 2019 rose from ($3.00) to ($0.50)/share and 2020 estimates went from $4.86 to $5.73/share.

It’s considered a foregone conclusion that fully electric vehicles will some day supplant gasoline powered cars, but it was far from clear that Tesla would survive to lead that revolution to fruition.

Make no mistake about it, recent results suggest that other aspirants in the electric auto market are going to have to keep chasing Tesla for the foreseeable future.

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