Shares of Tesla (NASDAQ: TSLA) were up by 9.8% on Thursday to close at $815.12 following the electric vehicle (EV) maker’s better-than-expected Q2 results.
Mizuho Securities analyst Vijay Rakesh weighed in on these results. The analyst retained his bullish thesis on the stock with a Buy rating and raised the price target to $1,175 from $1,150. The top-rated analyst’s price target implies an upside potential of 44.5% at current levels.
Let us look at the reasons behind the analyst’s optimistic outlook on the stock.
Tesla’s Q2 ResultsTesla’s revenues soared 42% year-over-year to $16.93 billion, but it slightly missed the consensus estimate of $17.1 billion. Adjusted earnings came in at $2.27 per share, up 56.6% year-over-year and exceeding the consensus estimate of $1.81.
Analyst Rakesh was particularly upbeat about Tesla’s automotive gross margin of 27.9%, which was up 40 basis points year-over-year but declined 380 basis points quarter-on-quarter. Rakesh pointed out that this gross margin was above consensus estimates despite shutdowns in Shanghai and higher costs, “comfortably above GMs [gross margins] for legacy/ICE [internal combustion engine] Auto OEMs [Original Equipment Manufacturers] at 10-25%.”
The company’s management stated on its Q2 earnings call, “…we are working through the ramp inefficiencies of our new factories, which are progressing well but have had an impact on margin as those factories come online.”
Tesla’s management also added, “While we continue to see a benefit from higher pricing flowing through, which experienced some foreign exchange-related headwinds, our cost structure continues to experience cost increases from inflation, commodities and logistics.”
However, when it comes to vehicle deliveries over the next few years, the company continues to target a compounded annual growth rate (CAGR) of 50%.
Tesla's Production Capacity Is Ramping UpIn Q2, TSLA produced 258,580 cars, which increased 25% year-over-year. It delivered 254,695 cars, up 27% year-over-year.
By the top-rated analyst’s estimate, the company’s installed annual production capacity is currently at more than 1.9 million vehicles, with production likely to reach approximately 40,000 per week by the end of this year. Rakesh anticipates that production at Tesla’s factories could grow by 20% year-over-year and potentially reach 50,000 per week by the end of 2023.
Rakesh is of the opinion that “its Shanghai Gigafactory capacity is mostly recovered, with 1) Gigafactories Berlin at ~1000/wk now and Texas expected to ramp to ~1000/wk in next few months.”
The analyst also noted that Tesla had raised the prices of its popular car models, Model 3 and Model Y, by 15% to 20% year-over-year, “we believe due to rising input costs and could benefit 3Q22/ SepQ with backlogs.”
Wall Street’s Take on TSLARakesh concluded, “Longer-term, we believe TSLA GMs [gross margins] could benefit from economies of scale, manufacturing efficiencies, and technology advancements such as 4680 [Tesla’s new battery].”
The analyst added that over the medium-term, “investor concerns revolve less around TSLA's strong production ramp, profitability, or execution and more on the health of the consumer amid concerns of a broader global slowdown into 4Q22.”
Wall Street analysts are cautiously optimistic about Tesla, with a Moderate Buy consensus rating based on 17 Buys, five Holds, and seven Sells. The average Tesla price target of $886.04 implies an upside potential of 8.7% at current levels.
Bottom LineWhile Tesla seems to be riding through the current challenging macro environment well, it remains to be seen how it measures up if the current economic slowdown continues.
Investor sentiment is also very positive about the stock, according to the TipRanks Crowd Wisdom tool. This tool indicates that 18.7% of the best-performing portfolios on TipRanks have upped their holding of the stock in the past 30 days.