Tesla Sales Are Expected to Soar, as Profits Falls

(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of TSLA.)

Shares of Tesla, Inc. (TSLA) have climbed higher this year driven by a vision of the future with the launch of the Model 3. To no surprise, analysts have been raising revenue estimates, however, at the same time they have been bringing down earnings estimates. In a split decision, it should send a signal to investors about a couple of things that the street is pondering. There are only a few areas that could create the current scenario, and it is likely to either be due to rising cost or increased spending in Research and Development or Capital Expenditures.

Investors are buying into the Tesla growth story with a rising stock price and analysts revenue estimates that continue to rise. However, the bottom line is a different story and if the stock is to continue to climb well into the future it is likely that the company will need to show profits. (For more, see also: Tesla Shorts Burn a Further $400 Million.)

Rising Revenue

Since the start of 2017, analysts have been raising revenue estimates aggressively for Tesla, with estimates for 2018 rising by nearly 28% to $19.7 billion for 2018, and by almost 25% for 2019 to $27.2 billion. These are very significant increases in such a short period, and it is a clear signal that the Street is buying into the Tesla growth story, at least from a revenue side.

Falling EPS

Despite the bullishness on revenue growth, the same can't be said about earnings growth. Earnings Per Share estimates since the start of 2017 have done a 180-degree turn, falling to a loss of $0.78 from a gain of $1.50, while 2019 estimates have dropped by 25% to $6.30. (For more, see also: The Case Against Tesla.)

Increased Spending

The reason for the differing direction in revenue and EPS could come from increasing operating cost beyond gross margins, that is because analysts estimate a gross margin for 2018 has risen by nearly 320 basis points to 21.9%. Meanwhile 2019 estimates have fallen by only 50 basis points to 23.7%. However, it could be a result of rising operating expenses and increases in depreciation and amortization. Deprecation and Amortization are directly impacted by Capital Expenditure, which analysts see as something that is expected to stay high. So far this year, analysts have raised their expectations for Capital Expenditures by roughly $560 million to $2.844 billion in 2018, and by $950 million in 2019 to just over $3 billion.

For now, investors are pushing Tesla stock price higher on an improving revenue outlook—and not on an improving bottom line. At some point, investors will demand to see profits, but at this stage of the game, investors seem just fine with a company that is spending its way to growth.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

Let's block ads! (Why?)