Tesla Stock Soars On Surprise Earnings Beat: Buy, Sell, Or Hold?

Summary:

• Tesla, Inc.’s stock has surged 26% in 2 days, after Q3 earnings beat consensus expectations, and management provided an optimistic vehicle growth outlook of 20-30% for next year.
• From a technical perspective, Tesla has broken out above a key resistance level, and looks primed for a momentum-driven run into the $300s going into year-end and 2025.
• Despite positive business momentum, TSLA’s 5-year expected CAGR return has dropped to ~10%. And potential economic headwinds justify maintaining a “Hold” rating.

Introduction

On the back of reporting its Q3 2024 financial results, Tesla, Inc. (NASDAQ:TSLA) stock blasted up by +26% from $213.65 to $269.19 per share over the past couple of trading sessions:

While Tesla missed consensus revenue estimates for Q3, stronger-than-expected margin performance drove a sizable earnings beat. Furthermore, CEO Elon Musk & Co. provided an optimistic vehicle growth outlook of 20-30% for next year – based on cheaper models and autonomy prospects!

Now, considering the wildly bullish reaction to the report and earnings conference call, Mr. Market seems exhilarated. However, as prudent investors, it is our responsibility to ignore short-term stock price fluctuations and focus on the business. Hence, in today’s report, we will first review Tesla’s latest quarterly result. Then, we will re-evaluate Tesla’s long-term risk/reward and technical chart to formulate an informed investment decision in light of the new information received from the Q3 2024 report and earnings conference call. Let’s dive right in!

How Did Tesla Fare In Q3 2024?

In Q3 2024, Tesla generated $25.18B in revenues, driven by continued momentum in its Energy Generation and Storage business [+52% y/y] and a return to positive y/y growth in its automotive business – with higher vehicle delivery volumes offsetting lower ASPs.

While Tesla’s +8% y/y top-line growth is still nothing to write home about, the EV giant’s Q3 2024 margin performance across all its business lines was mighty impressive. The auto gross margin came in well ahead of consensus estimates, and the energy gross margin breaking past 30%.

Despite Tesla’s price-cutting frenzy appearing to be a thing of the past, Musk & Co. are utilizing “attractive financing options” [indirect price cuts] to boost deliveries. Fortunately, Tesla is masterfully squeezing cost out of its vehicles, as evidenced by the record-low ACV [average cost per vehicle] Tesla recorded in Q3.

For now, Tesla’s margins seem to have bottomed; however, as per Tesla’s CFO, Vaibhav Taneja:

Sustaining these margins in Q4, however, will be challenging given the current economic environment. Note that we are focused on the cost per vehicle, and there are numerous work streams within the company to squeeze that cost without compromising on customer experience.

Back in September, the US Federal Reserve kicked off a rate-cutting cycle with a 50 bps reduction in the federal funds rate. While lower interest rates should boost auto demand and pad Tesla’s margins further, long-dated US treasury yields have spiked higher since the Fed’s rate cut. Given Tesla’s continued reliance on “attractive financing options” like 0% APR on Model Y/3, Tesla may fail to replicate its margin performance next quarter.

Now, investing is a marathon and not a sprint. This saying is especially true in the case of Tesla, as the EV giant draws most of its value from its ambitious AI projects – namely, FSD/robotaxis (Cybercab) and Optimus Humanoid bots.

• Tesla: A $500B Gamble On Autonomy.

As a shareholder, I am delighted to see TSLA stock rocketing higher on a stronger-than-expected quarterly report. However, I must admit that Tesla’s “We, Robot” event was disappointing due to vague timelines for Cybercab and no timelines for Robovan and Optimus.

In my mind, Tesla remains a binary bet on Autonomy. And given TSLA’s latest leg up, the stakes are now even higher!

Yes, Tesla is regaining business momentum, with revenue and earnings growth picking back up. However, Tesla is still stuck between two major growth waves.

Fortunately, cheaper models built on the Model 3/Y platform (with some aspects of Tesla’s next-gen vehicle platform) are on track to enter production early next year, and this means production volume growth could be just around the corner:

According to Elon Musk, more affordable models and autonomy are set to drive rapid vehicle volume growth at Tesla over the next couple of years (emphasis added):

Notwithstanding negative external events, like if there’s some force majeure events, like some big war breaks out or interest rates go sky high or something like that, then we can’t overcome massive force majeure events. But I think with our lower cost vehicles with the advent of autonomy something like a 20% to 30% growth next year is my best guess.

And then Cybercab reaching volume production in ’26. I do feel confident of Cybercab reaching volume production in ’26. So just starting production, reaching volume production in ’26. And that’s — that should be substantial. And we’re aiming for at least 2 million units a year of Cybercab. That’ll be in more than one factory, but I think it’s at least 2 million units a year, maybe 4 million ultimately.

As I see it, barring a hard landing in the economy, Tesla’s positive business momentum will continue in Q4 2024 and extend into next year. However, the risks of a deflationary recession and stagflation are genuine. And even in a soft/no landing scenario, Tesla’s trading multiples are at nosebleed levels.

Based on our long-term growth [25% CAGR growth for the next five years] and steady-state FCF margin [20%] assumptions:

Tesla Remains A Hold In The $260s

At our previous assessment ($245 per share) earlier this month, Tesla’s stock had a downside of ~27% to our fair value estimate. With TSLA stock moving to $269 per share, this gap has expanded to ~33% amid no change in our fair value estimate post Q3 earnings.

Assuming a base case exit multiple of ~25x P/FCF, I now see Tesla stock going from ~$269 to ~$436 per share over the next five years at a ~10.1% CAGR. While Tesla’s 5-year expected CAGR return has dropped from ~12% to ~10%, Tesla stock is still a “Hold” under our valuation methodology.

Concluding Thoughts: Is Tesla Stock A Buy, Sell, Or Hold?

Heading into the Tesla robotaxi event, I downgraded the stock to a “Hold” rating, citing TSLA’s long-term risk/reward and technical setup:

Given the pre-event run-up in Tesla stock, the post-event price action could mirror “buy the rumor, sell the news,” especially if the robotaxi unveiling event is light on details and/or simply fails to inspire confidence in Tesla’s Cybercab plans. With the bulk of Tesla’s market cap being attributable to its ambitions AI/FSD projects, it is a binary bet on autonomy. The Q3 delivery miss is nothing but noise.

From a technical standpoint, Tesla looks finely balanced. A sustained breakout above $260 would be pretty bullish and open up a move into the $300s going into year-end. This is my prediction for a successful “We, Robot.”

On the flip side, if “We, Robot” disappoints, Tesla could re-test support in the $180-210 range in the near term, which I have suggested as a decent buying area for long-term investors in the past:

From a technical standpoint, Tesla’s bullish momentum is still intact despite its post-ER pullback, as TSLA stock is still trading above a confluence of key moving averages, i.e., 10-week, 20-week, 40-week, and 100-week. In my view, the $185-210 range should serve as a strong support for the stock, with the rising trend line connecting bottoms from 2020, 2022, and 2023 (marked in yellow dotted line) providing secondary support at ~$165. This seems like a decent buying area for long-term investors.

Now, if TSLA stock starts breaking down below $160-165 again, then we could see another leg down into the low-$100s. Such a decline would likely materialize in the event of a hard landing in the economy. Tesla is currently investing billions of dollars into its ambitious AI projects. However, if its core businesses were to become unprofitable during a recession, the company could have to pull back on its autonomy investments due to lack of capital. A failure or perception of failure on autonomy can relegate TSLA stock to an auto industry P/E multiple, i.e., $30-60 per share.

Heading into Tesla, Inc.’s robotaxi unveiling event, TSLA’s long-term risk/reward [5-year expected CAGR: ~12%] isn’t attractive enough to warrant a “Buy” rating. Furthermore, the outcome of this event is highly uncertain, and the stock could really go either way. Henceforth, I am moving my rating on Tesla from “Buy” to “Hold” ahead of the October 10 showpiece event!

Source: Tesla: Ignore The Delivery Miss Noise, Focus On ‘We, Robot.’

With “We, Robot” leaving much to be desired, Tesla plunged from the mid-$200s to the low-$200s heading into the Q3 2024 report last week – justifying my caution. However, a stronger-than-expected quarterly report and positive business outlook have undoubtedly spurred renewed buying interest in the EV giant’s stock. If bullish momentum holds, TSLA could push into the $300s after its decisive breakout above the $260 level. However, considering Tesla’s long-term risk/reward, i.e., a 5-year expected return of ~10%, I am sticking with my “Hold” rating.

Key Takeaway: In light of its Q3 report, I continue to rate Tesla a “Hold.”

Thanks for reading, and happy investing. Please share your thoughts, concerns, and/or questions in the comments section below.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of TSLA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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