Investment Banks Express Concerns About Tesla Despite its Earnings Beating Market Expectations

On Wednesday, Tesla released its third-quarter earnings report that exceeded market expectations. Tesla's revenue in the third quarter increased by nearly 8% YoY, which was still lower than expected. But the earnings were surprising with the gross profit margin rising 195 basis points to 19.8%.

In addition, Tesla expected car deliveries to increase by 20%-30% in 2025 and the safety performance of Fully Self-Driving (FSD) to exceed human capabilities in the second quarter of 2025. Tesla surged over 12% on the earnings surprise before the opening of the US market on Thursday. However, can this earnings report dispel far-fetched concerns about Tesla's growth? Goldman Sachs and Morgan Stanley are both still a bit cautious.

On Wednesday, October 23, Goldman Sachs slightly raised its price target for Tesla for the next 12 months from $230 to $250 and maintained a neutral rating. Analyst Mark Delaney said that the earnings report was an incrementally positive sign. However, Goldman Sachs was skeptical that Tesla would be able to meet its FSD performance and vehicle delivery growth targets by 2025, as well as the sustainability of its gross margins.

Goldman Sachs believed that Tesla has good prospects for long-term growth thanks to its leadership in electric vehicles, the scope and depth of its technological capabilities in artificial intelligence, software, and hardware, and its ability to benefit from a full suite of solutions including charging and storage.Nevertheless, Goldman Sachs also addresses some constraints:

1. Expected FSD growth takes longer than Tesla currently targets
2. Automotive fundamentals are deemed to be likely to remain volatile in the short term (lower prices or reduced incentives are a detriment and deliveries are expected to be slightly lower than Tesla's expectations for 2024 or 2025
3. Valuations are believed to be in the right place. Overall, we are raising our estimated earnings per share (EPS) primarily due to higher gross margins and higher regulatory credit revenues.

Morgan Stanley's strategy analysts such as Adam Jonas said the strong earnings report may mark the “bottom” of earnings expectations and sentiment in the auto industry. However, they had question marks over whether Tesla has eased its growth concerns.

Morgan Stanley raised several unanswered questions that the market is concerned about in its report titled “Does Strong Gross Margins or Free Cash Flow that Beat Expectations Ease Growth Concerns". Morgan Stanley's questions include

1. What is the direction of Tesla's growth in capital expense? What percent of capital expense is AI? And, how long does its payback cycle take?
2. What is Tesla's path or next milestones for Autopilot, government certifications, and insurance before the launch of “unregulated” Autopilot in FY2025?
3. Will Tesla's Q4 margins be an anomaly that will prevent it from meeting expectations?Energy Storage Systems (ESS) growth is expected to exceed 180% in Q4. What is driving this growth? And, how much would the price per kWh need to fall to achieve such growth?