3 Reasons Tesla’s Monster Earnings Will Help It Continue to Crush the Nasdaq in 2022

You’re here (TSLA 6.28% ) CEO Elon Musk is as polarizing a figure as it gets. On the one hand, it has propelled the electric vehicle (EV) industry from a dubious concept to becoming a trend that mainstream automakers are trying to follow. But he also receives criticism for actions such as his online behavior and his multi-billion dollar purchase proposal. Twitter ( TWTR 0.23% ).

However, it is clear that Tesla is a remarkable company. Tesla stock is up on the year while the Nasdaq Composite is down 13% and virtually every major automaker to EV newcomer – from Toyota for Rivian Automotive, is down 5% to 66%. Here’s why Tesla continues to defy Nasdaq gravity in 2022, and whether the stock is a good buy now.

Image source: Tesla.

1. Tesla outperforms the competition

Tesla tends to release its quarterly production and delivery numbers about two to three weeks before its earnings report. On April 2, Tesla reported quarterly production of 305,407 units and shipments of 310,048 units, which is a big jump from first quarter 2021 results of 180,338 units produced and 184,800 units shipped. However, the quarter-over-quarter growth marked a major slowdown from what investors were used to, as Tesla produced 305,840 units in the fourth quarter of 2021 and shipped 308,600 units. Tesla attributed the slowdown to supply chain challenges and factory closures.

However, Tesla’s growth prospects are favorable. The company began production and delivery from its Berlin factory in March and just started production from its Texas factory in April. The opening of the two new factories will ease pressure on Tesla’s Shanghai factory and could enable it to continue to manage supply chain challenges and the global shortage of chips, materials and batteries better than its peers. .

In its recent investor presentation, Tesla said it had started deliveries of its crossover SUV, the Model Y, from its Texas plant and its German plant – while working to shift battery cell production to China. internally and to diversify its supply chain and purchases. process.

In summary, Tesla is showing resilience during an industry-wide shortage while paving the way for another record year of production and delivery in 2022.

2. Tesla is growing faster than ever

Even with weaker production and delivery numbers in the first quarter of 2022, it’s worth mentioning that Tesla’s revenue, earnings and free cash flow growth continues to impress investors.

The company reported automotive revenue of $16.86 billion in the first quarter of 2022, an 87% year-over-year increase. In the first quarter of 2022 alone, Tesla produced 36% of the automotive revenue it made for all of 2021. Tesla cited its increased selling price as one of the reasons for the higher revenue growth.

Despite the rise in revenue, Tesla’s operating expenses were about the same at $1.86 billion, up from $1.62 billion in 2021, just 15% higher as total revenue was 81% higher. Similarly, net cash provided by operating activities in the first quarter of 2022 was 143% higher than in the first quarter of 2021, but capital expenditures were only 31% higher, while driving a flow of free cash of $2.23 billion, the second highest quarterly performance on record. Tesla ended the quarter with $17.51 ​​billion in cash and cash equivalents on its balance sheet.

3. Tesla is more profitable than ever

One of Tesla’s most impressive statistics is its operating margin. Unlike gross margin, which takes into account the cost of goods sold, operating margin also takes into account operating expenses such as utilities, salaries, selling, general and administrative expenses, sales and marketing, research and development and other operating costs. deals. Tesla posted a record operating margin of 19.2% in the first quarter of 2022, which means that for every dollar of revenue generated, it earned an operating profit of 19.2 cents. For comparison, here are the 2021 operating margins of major automakers, including Tesla.

Chart of TSLA operating margin (annual)

TSLA operating margin (annual) given by Y-Charts

Tesla cited increased vehicle deliveries, higher average selling prices, lower cost of goods sold, lower stock-based compensation, and increased sales of regulatory credits as drivers of profitability that offset higher raw material, commodity, logistics and shipping costs and increased operating costs. expenses.

In an industry constrained by rising raw material costs, rising parts and component costs, rising shipping and freight costs, and rising labor costs, it is impressive to see Tesla will increase its operating margin as other major automakers will likely announce lower operating margins in quarters. to come.

Tesla is a phenomenal company but an expensive stock

The investment thesis for Tesla remains intact. And in many ways, it’s getting harder and harder to argue that Tesla isn’t the world’s best automaker. It has the biggest growth prospects, the best technology and is ahead of the curve as the competition tries to catch up, it continues to deliver on its promise. Tesla is more profitable than ever and has its own charging network as well as investments in solar power and energy storage. It also has a lean business model that does not depend on the dealer network. But as Warren Buffett so aptly put it, “you pay a very high price in the stock market for a happy consensus.” In other words, big companies are often expansive stocks. And this logic applies perfectly to Tesla.

Tesla’s market capitalization is $1.08 trillion. It earned adjusted non-GAAP diluted earnings per share (EPS) of $3.22 in the first quarter of 2022. So even if Tesla continues to grow earnings and earn, say, $15 in adjusted EPS in 2022 , it would still have a forward price-to-earnings ratio of around 70. Tesla stock is by no means cheap. And it shouldn’t be — it really is a really good deal. For risk-tolerant investors who are optimistic about the growth of the electric vehicle industry, adding Tesla to a diversified basket of electric vehicle stocks isn’t the worst idea as long as it’s understood that the stock Tesla is subject to strong ups and downs. In the past year alone, Tesla stock has reached $1,243.49 per share and as low as $546.98 per share.

As with any business, it’s important to understand what you’re buying and why you want to own it. With Tesla, the investment thesis is simple. It’s a bet on long-term growth in EV adoption by buying the industry leader at a premium. For some people, this is a thesis that makes sense. But for others, electric car stock may just be an awesome undertaking that’s just too expensive to consider now.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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