Tesla Stock Up 16%, Beats Low Expectations, Plans Cheaper Cars

Key Takeaway

• Tesla's stock surged 16% after Q1 results beat gloomy expectations, with plans to launch less expensive cars boosting sentiment.
• Bank of America upgraded Tesla to buy with a $220 PT; financials showed a mixed picture but exceeded some key estimates.
• Despite a revenue drop and negative free cash flow, Tesla is accelerating new model launches and focusing on cost reductions.

Market Response to Tesla's Earnings

Tesla shares experienced a significant surge, jumping as much as 16% on Wednesday, marking the largest intraday increase since March 2021. This reaction came after the electric vehicle (EV) manufacturer announced its first-quarter results, which were perceived as better than feared by investors and analysts alike. The company's decision to accelerate the launch of less expensive cars in an effort to boost demand was a key factor driving positive sentiment. Despite a challenging quarter, Tesla's strategic adjustments and future plans have reignited interest in its growth narrative.

Analysts from major financial institutions provided varied perspectives on Tesla's performance and outlook. Bank of America upgraded Tesla to buy from neutral, with a price target (PT) of $220, highlighting the company's better-than-expected results and strategic moves to address key concerns. Citi, maintaining a neutral stance, adjusted its PT slightly to $182 from $180, noting the company's gross margin exceeded expectations. Piper Sandler and Jefferies also commented on the positive surprise of the results and the strategic shift towards accelerating new product launches, including more affordable models.

Financial Performance Insights

Tesla's financial results for the first quarter revealed a mixed picture. The company reported a gross margin of 17.4%, down from 19.3% year-over-year but above the Bloomberg Consensus estimate of 16.5%. Adjusted earnings per share (EPS) came in at 45 cents, below the previous year's 85 cents and slightly under the estimated 52 cents. Revenue saw an 8.7% decrease year-over-year to $21.30 billion, missing the $22.3 billion estimate. Notably, Tesla experienced negative free cash flow of $2.53 billion, contrasting with the positive $441 million from the previous year and missing the positive $653.6 million estimate. Capital expenditures rose by 34% year-over-year to $2.77 billion, indicating continued investment in growth despite the revenue drop.

Strategic Shifts and Future Plans

Tesla's management provided insights into their strategic direction and future plans during the earnings call and in their commentary. The company is focusing on accelerating the launch of new models, including more affordable vehicles, by a year, aiming for a start of production in the second half of 2025. This move is part of a broader strategy to address cooling demand and compete more effectively in the EV market. Tesla also emphasized its commitment to company-wide cost reduction, including reducing the cost of goods sold (COGS) per vehicle. Despite a sequential decrease in production at Gigafactory Shanghai, attributed to seasonality and planned shutdowns, Tesla is working on ride-hailing functionality and remains committed to its robotaxi vision, although clarity on the timeframe and business model is still pending.

Street Views

• John Murphy, Bank of America (Bullish on Tesla):

  "Tesla results were better-than-expected and the management addressed 'key concerns heading into the quarter and revitalized the growth narrative'... In the near-term the tide in news flow appears to suggest the risk to the stock is skewing more positively."

• Itay Michaeli, Citi (Neutral on Tesla):

  "Tesla’s results were better-than-feared with 'gross margin ahead of expectations'... The quarter won’t settle recent debates and consensus estimates still seem vulnerable, but with the stock down 42% YTD, the favorable reaction makes sense."

• Alexander Potter, Piper Sandler (Bullish on Tesla):

  "The slate of negative new about weak deliveries, delayed capex, mass layoffs and price cuts 'led investors to expect the worst' though 'the results were better than feared'... While the post-earnings conference call keeps focus on AI, [Tesla] management teases new growth ideas."

• Philippe Houchois, Jefferies (Neutral on Tesla):

  "Elon Musk seems to be 'appeasing the market by accelerating new product launches'. While Tesla’s commitment to robotaxi looks unwavering,'clarity on timeframe and business model' is lacking."

• Adam Jonas, Morgan Stanley (Bullish on Tesla):

  "1Q had something for everyone. Not as bad as many feared but questions remain regarding near-term growth/profitability... Accelerated new product launches (on existing lines) and details on ride-hailing app were unexpected features."

• William Stein, Truist (Neutral on Tesla):

  "[Tesla] management continues to view company's sales growth as dipping between prior growth cycle of Model 3/Y platform & next growth cycle of next-gen platform."