Tesla’s Q3 Earnings Shocked Skeptics, But Wall Street Is Worried About One Problem

Tesla CEO Elon Musk.

Elon Musk touted Tesla’s faster-than-expected progress in the Shanghai Gigafactory and Model Y production in a tweet on Wednesday. Nora Tam/South China Morning Post via Getty Images

Tesla shocked Wall Street Wednesday afternoon when it posted a surprise profit of $143 million, instead of an expected loss, for the third quarter which ended September 30. Although quarterly revenue fell slightly short of expectations and declined from a year ago, investors chose to focus on the adjusted per-share earnings of $1.86 (versus the forecasted -$0.42 per share), driving share prices to surge over 20% in the after hours to a peak since February.

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CEO Elon Musk also touted his company’s ahead-of-schedule progress with the Shanghai Gigafactory (which will be used to produce Model 3 sedans for the China market) and the long-awaited Model Y release, increased sales of solar panels and a positive cash flow of over $5 billion.

However, a few Wall Street analysts are concerned about the implications behind Tesla’s flat sales growth.

For the third quarter, the electric carmaker posted a revenue of $6.3 billion, a tad short of the expected $6.33 billion and down from $6.8 billion a year ago.

“The one very concerning aspect of the quarter was that top-line growth reversed to a decline, with [third-quarter] deliveries up a mere 2% sequentially from [the second quarter],” Bank of America analyst John Murphy wrote in a note, stating that it was “the first decline in seven years for a ‘growth’ company.”

Murphy has an underperform rating on Tesla stock with a price target of $235. (Tesla stock is currently trading at $295, valuing the company at $52 billion.) Expecting further slowdown in EV deliveries, he said Tesla investors should start thinking about whether the company is fairly valued.

“With this in mind, we have to question whether the valuation premium being ascribed to TSLA as a ‘growth’ or ‘technology’ unicorn is truly justified,” Murphy said.

Alternatively, if Tesla wants to keep its fierce growth pace like in previous periods, the company will have to keep spending, which may eventually cut into profitability. Tesla’s third-quarter profit was largely driven by cost cutting.

“Cost control can help a quarter, but we struggle to understand how spending doesn’t have to go up to support Tesla’s growth ambitions,” said RBC Capital Markets’ Joseph Spak. He also has an underperform rating on the stock and a price target of $220.

Tesla’s Q3 Earnings Shocked Skeptics, But Wall Street Is Worried About One Problem