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Tesla Turns a Profit, But Is This Sustainable?

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Tesla's (TSLA) surprise profit was one of a kind. 

The stock soared 17.79% to $300 a share Thursday. 

Given the nature of Tesla's beat, analysts are questioning this quarter's sustainability. 

First, let's go over results versus expectations. 

The Earnings 

Some may have shuddered after reading the third quarter top-line result, as Tesla posted revenue of $6.303 billion, missing Wall Street estimates of $6.425 billion. But against analyst expectations of a 42 cent loss per share, the electric vehicle giant said it profited to the tune of $1.86 per share on an adjusted basis. Adjusted net income was $342 million. GAAP EPS was 80 cents. Free cash flow was $371 million, putting estimates of $32 million to shame. 

Tesla sold 79,703 Model 3 cars, its lowest priced car, more than the expected 78,500, leaving the higher priced Model S and Model X sales to slightly missed estimates. Wall Street was hoping to see Tesla report a higher mix of high priced cars, which could have boosted gross margins. Still, Tesla posted an adjusted gross margin of 22%, beating estimates of 18%. 

Tesla's ability to turn a net profit for the quarter was all about cost controls, and the company said exactly that on the first page of its earnings report out Wednesday afternoon, noting production efficiencies.  "This year our focus has been cost control and preparing for our next phase of growth," Tesla said. 

"Despite reductions in the average selling price (ASP) of Model 3 as global mix stabilizes, our gross margins have strengthened. Additionally, operating expenses are at the lowest level since Model 3 production started."

Now, the skepticism is beginning to creep in. 

Is This Sustainable?

Needham & Co. analyst Rajvindra Gill wrote in a Thursday morning note, "Quarterly net profit surprises, but is it sustainable?" 

Wedbush Securities analyst Dan Ives has  "worries that the lack of investments and tighter expense model is not sustainable going forward." He added, "We are still taking a wait and see approach to see how sustainable this level of demand/profitability is going forward." 

For now, there are some answers to those questions. First off, Tesla indeed beat delivery estimates, saying it sold 97,186 vehicles, better than the expected 97,000. The company said it's confident it can delivery its guided range of 360,000 and 400,000 vehicles for all of 2019. For the fourth quarter, Tesla will have to deliver 105,000 cars. This is all while tightening costs. 

While somewhat skeptical, Ives raised his price target to $270 from $220. Even some bears raised their price targets. JPMorgan's Ryan Brinkman raised his price target to $220 from $200. 

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