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Analyzing Tesla's (TSLA) Potential Post Q3 Delivery Estimate Miss

Shares of Tesla TSLA dropped 2% yesterday following its third-quarter 2023 production and delivery results. After reporting record deliveries for the first two quarters of 2023, Tesla witnessed a sequential fall in its deliveries for the September quarter. Discouragingly, deliveries also fell short of expectations, which triggered the sell-off.

The electric vehicle (EV) king delivered 435,059 (15,985 Model S/X and 419,074 Model 3/Y) vehicles worldwide in the third quarter. While that’s a 26.5% increase from the year-ago levels, it marks a 6.6% sequential decline from 446,140 vehicles delivered in the second quarter of 2022. The Wall Street consensus estimates for third-quarter deliveries was approximately 455,000 units, per Teslarati.

Tesla produced 430,488 (416,800 Model 3/Y, and 13,688 Model S/X) vehicles during the quarter, up 17.6% on a yearly basis but down from 479,700 units produced in the second quarter of 2023.

The sequential decline in production and delivery volumes was due to planned factory shutdowns for an upgrade, as already notified by the company on its second-quarter 2023 earnings call. It remains to be seen if Tesla’s delivery miss in the third quarter would snap its earnings beat streak.

Apart from weaker-than-expected deliveries, Tesla slashed prices on its inventory vehicles and existing models throughout the third quarter, which is expected to have put pressure on its gross margins.

It is also suffering from shrinking operating margins. Tesla’s operating margins dipped to single digits in the second quarter of 2023. Operating margin was 9.6% (the lowest level in the past five quarters) amid unexpectedly higher costs involved in scaling up the production of new battery cells, the Cybertruck, and other large projects. Operating margins in the remaining quarters of 2023 are likely to be impacted by continued investments for capacity expansion of not just vehicle factories but also supercharging network service, internal applications and battery processes.

However, these are just some temporary hiccups and the long-term prospects of the EV behemoth remain quite promising.

Despite missing on third-quarter delivery numbers, Tesla affirmed that it remains committed to its annual delivery target of 1.8 million units, underscoring its preparedness for a significant push to achieve its highest-ever quarterly delivery numbers in the fourth quarter of 2023. In the first three quarters of 2023, TSLA delivered 1,324,054 vehicles. To meet its annual sales target, it needs to deliver around 476,000 vehicles. If the upgraded production lines, along with the introduction of the new Model 3 Highland in Europe and Asia and the initial Cybertruck deliveries, proceed as anticipated, there is scope for a significant surge in delivery volume.

And Tesla isn’t just about EVs. The company is also benefiting from increasing energy generation and storage revenues, thanks to the positive reception of Megapack and Powerwall products. Tesla is ramping up production at a dedicated Megapack factory to meet rising demand. With deployments expected to increase further, Tesla’s prospects remain solid beyond the automotive business as well.

The undisputed leader in EVs exited the second quarter of 2023 with $23.1 billion in cash/cash equivalents, up slightly from 2022 end. It’s also worth noting that the company’s debt levels are falling. Long-term debt and finance leases, net of the current portion, totaled $872 million as of Jun 30, 2023, down from $1,272 million as of Mar 31, 2023. Its long-term debt-to-capitalization of around 2.2% compares favorably with the industry’s 41%.

So, should you still consider investing in this EV giant, given its third-quarter delivery miss and downward revisions in its EPS estimates lately?

Notably, the Zacks Consensus Estimate for TSLA’s third-quarter earnings per share (EPS) has moved south by 3 cents to 75 cents over the past seven days. The bottom-line estimate, however, implies a year-over-year decline of 28.6%. The consensus estimate for full-year EPS has also been revised downward by 3 cents to $3.43, suggesting a drop of around 16% from 2022 levels.

Over the past three months, Tesla shares have declined roughly 13%, underperforming the industry as well as the S&P 500. Is this a buying opportunity?  At 6.58X forward sales currently, Tesla is trading much below its five-year high of 23.37X and near the median of 6.72X. For those seeking discounted TSLA shares, now could be the time.

While there could be better buying opportunities ahead, Tesla is trading at a far better valuation than it has in the past. Also, EVs still represent a relatively small portion of the auto industry market and the space has massive scope to grow.

So, we believe Tesla is a solid long-term investment option at current price levels based on its market leadership, broadening global operations, impressive charging business, strengthening balance sheet and new product developments that promise to take it to dizzy heights in the coming years.

Zacks Rank & Key Pick

Tesla currently carries a Zacks Rank #3 (Hold).

A top-ranked player in the same industry is Ford F.  A strong vehicle mix supported by F-series trucks and SUV models, combined with a robust EV lineup, should drive Ford’s growth. The company’s superior liquidity profile provides a solid foundation for investment in Ford+ priorities. Ford’s target of producing over 2 million EVs by 2026-end (representing 49% CAGR from 2023-2026) augurs well. The company’s high liquidity provides a solid foundation for investment in Ford+ priorities.

The Zacks Consensus Estimate for Ford’s 2023 sales and EPS indicates a year-over-year rise of 7.5% and 12.2%, respectively. The company currently carries a Zacks Rank #1 (Strong Buy) and has a Value Score of A.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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