Shares of Tesla Motors (TSLA) have plunged today after the upstart automaker beat earnings and revenue forecasts after yesterday’s close, as investors worried about rising costs. Deutsche Bank, however, has no such qualms, calling the report “‘very encouraging.”
AFP/Getty Images Deutsche Bank analyst Rod Lache and team explain why they”re encouraged by Tesla’s performance:
Perhaps most impressively this quarter, we noted that [Tesla's] clean gross profit (ex the charge) came in at approx. $183 MM, in-line with the clean gross profit in Q4 (Q4 reported product gross profit was $190.5 MM, but this included a $10.1 MM favorable warranty adjustment). This slight increase in gross profit was achieved despite a $47 MM sequential decline in revenue, suggesting that Tesla's cost structure improved significantly on a sequential basis, mitigating the impact of lower volume…
And results could continue to be better if average transaction prices remain near current levels. Tesla reiterated their 4Q14 gross margin guidance of 28%, which compares with DBe at 27.5%. Interestingly, Tesla's forecast assumes that average transaction prices attenuate by "several points". If this does not happen, [Tesla] may be able to exit the year with gross margins that are closer to 30%. And we continue believe that Tesla's gross margins are on track to exceed 30% in 2015, as the company ramps production beyond the 1,000 units per week, and volumes and average transaction prices benefit from the launch of the company's Model X.
About the only thing Lache wories about is Tesla’s valuation. As a result, he rates Tesla Neutral with a $220 price target. With Tesla trading down 8.9% at 183.48, that’s just about 20% of upside.
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