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Tesla Bears are Toast as the Company Reports a Full Year of Profits

Andrew Packer
Last Updated September 23, 2020 2:08 PM
  • Tesla Motors hit $2.18 on earnings (ex-items),
  • Revenue reached $6.04 billion against $5.37 billion expected.
  • The company is now eligible to join the S&P 500 Index.

Shares of Tesla Motors (NASDAQ:TSLA) are jumping higher after-hours. The company reported its quarterly earnings—and it was a massive beat.

The Bright Side of Tesla’s Earnings

On the surface, everything looks pitch-perfect for the electric automaker. In large part, that’s because analysts had little clue what to expect, with a range of $2.53 per share in losses to $1.45 in profit. The total number? A cool $2.18 per share. 

Tesla's Quarterly Numbers
From top to bottom, Tesla Motors beat expectations out of the water. | Source: CNBC 

Even better, revenue topped expectations, coming in just over $6 billion. There are a lot of ways for a company to fudge earnings like tax credits, but seeing a revenue beat is the real deal.

Best of all? The company’s profit margins grew from just under 19% to 25.4% . A company that grows its profit margins is one likely to continue to attract investors.

Finally, Tesla reported a tripling in revenue from regulatory credits. By offering zero-emission vehicles, it receives them for free. Traditional automakers buy them to comply with their overall emissions standards. Tesla sold over $428 million of these credits  to its competitors last quarter.

The earnings data point to a healthy return and contrast starkly to the overall economic picture right now. With four consecutive quarters of profit under its belt, the company can now qualify to become a member of the S&P 500 Index .

Should that happen, passive funds will have to buy billions in shares, likely sending them even higher.

The Dark Side of Tesla’s Earnings

It’s not all perfect, however. The company’s valuation remains insanely high, even with this earnings beat.

Simple math tells us that at $2.18 per share in quarterly profits, the company’s annualized return on that basis is a mere $8.72.

Divided by a price of $1,650 that TSLA was trading at after hours, and you get a price-to-earnings ratio of 189. That’s what happens when your shares have quadrupled since March. 

Yet even with that valuation, the massive surge of retail traders into shares has made it impossible to bet against them right now.

There’s a massive disconnect between Tesla and the rest of the industry. Tesla recently topped Toyota Motors (NYSE:TM) for the largest market cap in the sector, even as Toyota (and others) still sell far more cars.

Automaker market cap
Tesla has zoomed ahead of the rest of the auto sector to become the most significant player in the space, well before qualifying to be in the S&P 500. | Source: Zerohedge 

Yes, Tesla is growing as a company right now. A look at the broader economy and the valuation tells us that shares might be only good for one last hurrah, possibly on inclusion into the S&P 500 Index.

Watch out for this becoming the final FOMO trade before the next market pullback.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.