Shares of Tesla (NASDAQ: TSLA) were up by 9.8% on Thursday to close at $815.12 following the electric vehicle (EV) maker’s better-than-expected Q2 results.
Mizuho Securities analyst Vijay Rakesh weighed in on these results. The analyst retained his bullish thesis on the stock with a Buy rating and raised the price target to $1,175 from $1,150. The top-rated analyst’s price target implies an upside potential of 44.5% at current levels.
Let us look at the reasons behind the analyst’s optimistic outlook on the stock.
Tesla’s Q2 ResultsTesla’s revenues soared 42% year-over-year to $16.93 billion, but it slightly missed the consensus estimate of $17.1 billion. Adjusted earnings came in at $2.27 per share, up 56.6% year-over-year and exceeding the consensus estimate of $1.81.
Analyst Rakesh was particularly upbeat about Tesla’s automotive gross margin of 27.9%, which was up 40 basis points year-over-year but declined 380 basis points quarter-on-quarter. Rakesh pointed out that this gross margin was above consensus estimates despite shutdowns in Shanghai and higher costs, “comfortably above GMs [gross margins] for legacy/ICE [internal combustion engine] Auto OEMs [Original Equipment Manufacturers] at 10-25%.”
The company’s management stated on its Q2 earnings call, “…we are working through the ramp inefficiencies of our new factories, which are progressing well but have had an impact on margin as those factories come online.”
Tesla’s management also added, “While we continue to see a benefit from higher pricing flowing through, which experienced some foreign exchange-related headwinds, our cost structure continues to experience cost increases from inflation, commodities and logistics.”
However, when it comes to vehicle deliveries over the next few years, the company continues to target a compounded annual growth rate (CAGR) of 50%.
Tesla's Production Capacity Is Ramping UpIn Q2, TSLA produced 258,580 cars, which increased 25% year-over-year. It delivered 254,695 cars, up 27% year-over-year.
By the top-rated analyst’s estimate, the company’s installed annual production capacity is currently at more than 1.9 million vehicles, with production likely to reach approximately 40,000 per week by the end of this year. Rakesh anticipates that production at Tesla’s factories could grow by 20% year-over-year and potentially reach 50,000 per week by the end of 2023.
Rakesh is of the opinion that “its Shanghai Gigafactory capacity is mostly recovered, with 1) Gigafactories Berlin at ~1000/wk now and Texas expected to ramp to ~1000/wk in next few months.”
The analyst also noted that Tesla had raised the prices of its popular car models, Model 3 and Model Y, by 15% to 20% year-over-year, “we believe due to rising input costs and could benefit 3Q22/ SepQ with backlogs.”
Wall Street’s Take on TSLARakesh concluded, “Longer-term, we believe TSLA GMs [gross margins] could benefit from economies of scale, manufacturing efficiencies, and technology advancements such as 4680 [Tesla’s new battery].”
The analyst added that over the medium-term, “investor concerns revolve less around TSLA's strong production ramp, profitability, or execution and more on the health of the consumer amid concerns of a broader global slowdown into 4Q22.”
Wall Street analysts are cautiously optimistic about Tesla, with a Moderate Buy consensus rating based on 17 Buys, five Holds, and seven Sells. The average Tesla price target of $886.04 implies an upside potential of 8.7% at current levels.
Bottom LineWhile Tesla seems to be riding through the current challenging macro environment well, it remains to be seen how it measures up if the current economic slowdown continues.
Investor sentiment is also very positive about the stock, according to the TipRanks Crowd Wisdom tool. This tool indicates that 18.7% of the best-performing portfolios on TipRanks have upped their holding of the stock in the past 30 days.
Major names in the lithium mining space posted gains yesterday after Elon Musk called on entrepreneurs to enter lithium refining during Tesla’s (TSLA) second-quarter earnings call this week.
Concurrently, the Global X Lithium & Battery Tech ETF (LIT) rose nearly 2.7% yesterday. Let’s have a look at four major names in the space that rallied yesterday: Ioneer Limited, Lithium Americas, Sociedad Quimica, and Piedmont Lithium, and how they stack up.
Musk noted that lithium is one of the most common elements on the planet, but refining it into battery-grade lithium hydroxide and lithium carbonate and scaling the operations remains difficult.
Lithium prices have skyrocketed from $11 to around $80, and Tesla is entering lithium refining activity in Texas. Musk added, “There is like software margins in lithium processing right now. So, I would really like to encourage, once again, entrepreneurs to enter the lithium refining business. You can’t lose. It’s license to print money.”
Ioneer Limited (IONR)IONR shares closed 6.4% higher yesterday and rose a further 8.9% during the extended trading session. There are only two known deposits of lithium boron on the globe today, and IONR owns one of them in Nevada.
IONR completed the definitive feasibility study (DFS) for this project in 2020 and expects the Rhyolite Ridge project to be a long-life, low-cost operation. The project is expected to become operational in 2025.
Yesterday, IONR agreed to supply 7,000 tons per annum (TPA) of lithium carbonate to Ford (F) for a period of five years starting in 2025. Ford plans to use the supply to produce batteries for its electric vehicles.
Notably, IONR anticipates producing 20,600 TPA of lithium carbonate/hydroxide as well as 174,400 TPA of boric acid from the project over 26 years.
This provides long-term revenue visibility for the company, while the production of lithium as well as boric acid enables it to stay at the lower end of the cost curve.
Lithium Americas (LAC)Despite the recent correction, LAC shares rose 5.4% yesterday and are still up 67.4% over the past 12 months. LAC owns an interest in three projects. Two of these are located in Argentina and one in Nevada.
On July 20, LAC inaugurated its lithium technical development center (LiTDC) in Nevada. The center is set up to demonstrate the chemical process designed for LAC’s Thacker Pass lithium project (Nevada).
Furthermore, for Thacker Pass, LAC is advancing a feasibility study with a target of 40,000 TPA initial production capacity of lithium carbonate and a phase 2 target of 80,000 TPA. Results from this study are anticipated in 2H 2022.
In Argentina, LAC is eyeing 20,000 TPA of lithium carbonate equivalent at Cauchari-Olaroz. In the meantime, the Street is cautiously optimistic about the stock with a Moderate Buy consensus rating but sees a further 64.14% potential upside based on an average price target of $39.
Sociedad Quimica (SQM)SQM rose a total of 4.7% yesterday and is up a massive 87.8% over the past 12 months. While IONR does not yet have analyst coverage and LAC is a Moderate Buy, SQM has a Strong Buy consensus rating alongside a $114.20 price target. This indicates a 24.13% potential upside.
Revenues have increased from $1.82 billion in 2020 to $2.86 billion in 2021. Simultaneously, SQM's earnings have expanded from $0.79 per share in 2020 to $2.05 per share in 2021. These figures are further expected to rise to $8.6 billion and $10.2 per share, respectively, in 2023.
SQM has been benefiting from the rise in lithium prices and its long-term commercial strategy. The company has almost tripled its production in the past three years and remains a leader in lithium as well as potassium nitrate, iodine, and thermo solar salts.
Piedmont Lithium (PLL)Although PLL shares rose nearly 4.3% yesterday, the stock is down 33% over the past 12 months. Nonetheless, of all the names on our list today, the Street sees the maximum upside in PLL at 133.4% based on an average price target of $90.
PLL is in the exploration phase and owns the lithium project in the Carolina tin-spodumene belt. It also has partnerships with Sayona Mining in Quebec and with Atlantic Lithium in Ghana.
The company expects operations at its North American Lithium (NAL) project in Quebec to commence in H1 2023 and aims to become revenue-generating in 2023.
This geographic resource diversification bodes well for the company and, impressively, it was added to the U.S. Russell 2000 index as well as the Russell Microcap index last month as well.
Closing NoteAs the world weans away from fossil fuels and battery usage keeps rising, lithium will continue to play a pivotal role. Musk’s comments further underscore the massive potential in the lithium space, and the names on our list today stand to gain big.
Furthermore, the tectonic shifts in the geopolitical dynamics globally mean the U.S. and Europe are looking to reduce their dependence on China for battery-grade lithium and concentrates, and these companies with resources and focus on the U.S. should benefit in the long term.
Read the full Disclosure
Despite the myriad issues Tesla (TSLA) faced in Q2, the EV leader still managed to deliver a better-than-expected earnings report.
The company generated revenue of $16.934 billion, just a touch above the Street’s call for $16.628 billion. There was a more impressive beat on the bottom-line, as diluted EPS of $2.27 came in some way above the $1.78 analysts had predicted.
One area of concern, however, was noted in the margin profile, which suffered at the hands of rising inflation and stiff competition for EV parts. Margins contracted to 27.9%, below the impressive 32.9% reported in Q1 and the 28.4% delivered during the same period last year. The margin drop was linked to the costs associated with the ramping of the new facilities in Austin and Berlin.
CEO Elon Musk said that in June the Berlin factory’s output reached over 1,000 cars a week, and the Austin factory is expected to be able to attain the same amount over the coming months. By the end of this year, Tesla is eyeing the production of 40,000 units a week, a 25% increase on the recent peak of around 30,000 vehicles a week.
Surveying the results, Morgan Stanley’s Adam Jonas notes that demand is still outstripping supply. Although with the “new challenges” on account of the ramping of production - especially in Berlin - the analyst is readying for further “near-term margin headwinds.”
Where the stock is concerned, the analyst remains “constructive,” but thinks it will take more to move the needle significantly in either direction.
“Hard to see what really rocks the boat on consensus on Tesla until the company posts a more significant margin miss and/or we see evidence of new growth/margin profile from the ramp of Berlin and Austin,” the analyst said. “In the interim, we have a stock trading at approx20x EBITDA and 35x our current FY25 forecasts… multiples that many auto investors are likely to find unacceptably high but tech investors may find attractive…”
Jonas seems to find those multiples acceptable. The analyst reiterated an Overweight (i.e., Buy) rating along with a $1,150 price target, implying room for share appreciation of 41% over the coming year. (To watch Jonas’s track record, click here)
Most are backing TSLA’s continued success, but there are voices heeding caution; the stock’s Moderate Buy consensus rating is based on 17 Buys, 5 Holds and 7 Sells. Going by the $886.04 average target, shares are expected to climb a modest 9% over the one-year timeframe. (See Tesla stock forecast on TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.