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Tesla Downshifts on Earnings Miss and Shrinking Margins

Tesla shares fall after mixed results suggest profit margins are shrinking and that its relying more on cash from its soaring share price to fuel its expansion.

Tesla  (TSLA) - Get Tesla Inc. Report shares downshifted on Thursday after the electric carmaker posted mixed results that suggested its profit margins are shrinking and that its relying more on cash raised from its soaring share price to continue fueling its expansion.

Tesla shares were down 2.36% at $843.79 in Thursday trading and falling as much as 8.1% to $794 in premarket. The stock had soared 933% since the beginning of last year.

Tesla reported an adjusted fourth-quarter profit of 80 cents a share after the closing bell on Wednesday, falling short of analysts’ forecasts and well below year-earlier, pre-pandemic results. While it was the sixth straight profitable quarter for Tesla, it was also the first time the company missed Wall Street’s per-share earnings estimates since July 2019.

Of note to analysts and investors: operating margins, which shrank to 5.4% in the fourth quarter, down from 9.2% in the July-September period. Also of note: the company’s apparent reliance on strong present and future demand in China.

Price cutting in China, supply-chain costs and a big pay package for CEO Elon Musk and other executives were also on the list of reasons behind the lower numbers, according to Tesla.

While Tesla did well making money by selling regulatory credits to automakers that need them to comply with carbon-emissions standards in the U.S., Europe and elsewhere, some analysts were disappointed that the company isn’t making more money on its core business: selling cars.

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Sales of regulatory credits rose to $401 million in the last three months of the year, from $397 million in the third quarter. Tesla also said Wednesday that it sees deliveries growing at least 50% in 2021.

JMP Securities analyst Joseph Osha said in a research note that while Tesla’s “hard-to-forecast” emissions credit sales exceeded expectations he cannot justify higher target multiples than seven times revenue and 35 times earnings before income, taxes, depreciation and amortization. 

He downgraded Tesla to market perform from outperform.

Other analysts including Wedbush Securities’ Dan Ives were more impressed with the results. In a Thursday follow-up note, Ives maintained his $950 price target, his $1,250 bull case and his neutral rating on the shares, though conceded that given the “parabolic run” in shares that some “modest” post-earnings weakness Tesla’s share price would be par for the course.

“Seeing the forest through the trees for the broader EV market with Tesla leading the charge, demand is clearly inflecting globally with China firing on all cylinders," said Ives. "In our opinion the EV penetration story is just starting to hit into its next gear of growth - from 3% today globally to our forecast of 10% by 2025 which will benefit Tesla and many other players across the board.”