Tesla Motors Inc (NASDAQ:TSLA) shares plunged more than 13% last week after its quarterly results. The electric vehicle maker reported better than expected first quarter earnings of 12 cents a share. Revenues of $713 million also exceeded the consensus estimate of $699.1 million. Tesla delivered 6,457 Model S sedans during the quarter, well above the guidance of 6,400 units. So, what drove the stock down? Perhaps a soft second quarter guidance of $827 million in revenues with “marginal profitability.”
Tesla’s long-term growth prospects remain intact
If you look more closely, the sell-off was driven by investors (or speculators) digging into the microscopic details of the current quarter guidance. That may not be the right way to look at a growth stock like Tesla Motors Inc (NASDAQ:TSLA) that still needs to invest heavily to build infrastructure and expand operations. Tesla’s long-term story still remains intact. But those who read headlines about the electric vehicle maker last week would believe that the company is in trouble.
But if you read Tesla Motors Inc (NASDAQ:TSLA)’s earnings report yourself, you’ll see that the company is still unable to meet heavy global demand despite boosting its production by more than 70% over the last 12 months. Tesla is going to increase its capital spending. The company plans to ramp up its selling and administrative expenses, as well as R&D expenses. And it’s because of these expenses the company will be only “marginally profitable” in the June quarter.
Growth stocks usually tumble when analysts have to trim their short-term earnings estimates. But when you aren’t worrying about earnings estimate for the next quarter, you’ll see the amazing progress Tesla Motors Inc (NASDAQ:TSLA) has made, and is still making. The company last month started selling cars in China, and plans to launch the right-hand drive cars in the U.K. soon. Elon Musk is planning to triple the number of Supercharger stations from 100 to 300 by the end of this year.
Tesla could earn much bigger profits, but it’s doing what’s important
Of course, the San Francisco-based company could earn much bigger profits simply by avoiding to invest in these growth initiatives, and issue strong short-term guidance rather than “marginal profitability.” But without these investments, the company’s long-term business and valuation would suffer. It’s nothing less than impressive that the company is operating close to break-even despite these heavy investments, says Chris Umiastowski of the Globe Investor.
Tesla Motors Inc (NASDAQ:TSLA) is also planning its Gigafactory, which is expected to employ more than 6,500 people. When the factory achieves its full capacity by 2020, it will allow the company to sell 500K electric vehicles per year. Umiastowski estimates that the Gigafactory will be supporting about $30 billion in sales. Assuming just 10% profit margin, it will help generate about $3 billion in annual profits.
The hype-filled growth stocks like Tesla Motors Inc (NASDAQ:TSLA) depend on how much growth investors think will materialize. Even minor changes in near-term analyst estimates prompt people to make significantly larger changes in their valuation models. And that triggers volatility. After last week’s slide in Tesla, many would believe that the market hates the stock. But its business is still doing really well and long-term prospects remain intact.