tesla-earnings-were-a-gift-to-the-doubters-here’s-why.

Tesla Earnings Were a Gift to the Doubters. Here’s Why.

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Gains on Bitcoin contributed to the profit.

Justin Sullivan/Getty Images

Tesla reported higher earnings than expected Monday night, but those upbeat on the stock are now arguing with the doubters about the numbers, and whether the outperformance really was a beat.

At the moment, the bears have the upper hand. Tesla (ticker: TSLA) stock was down more than 3% in Tuesday trading, while the S&P 500 and Dow Jones Industrial Average were both close to flat.

Tesla reported 93 cents in adjusted earnings per share, while Wall Street was projecting 80 cents. But there were some negatives: Operating profit fell short of analysts’ expectations. The bottom-line numbers were helped by gains from trading Bitcoin, as well as higher-than-expected sales of regulatory credits Tesla earns for producing zero-emission vehicles.

It was a fine quarter, but given that Tesla stock rose more than 740% in 2020, analysts and investors expect a lot. Anything short of a spectacular result strengthens bears’ argument that the stock should fall, or at least stay at the current level.

Excluding income from regulatory credits sold to auto makers that haven’t met government requirements for producing zero-emission cars, gross profit margins for Tesla’s automotive business came in at about 22% in the first quarter. That is up from the fourth quarter, but a little below what analysts projected.

New Street Research analyst Pierre Ferragu, however, argues that margins didn’t miss expectations. He believes investors should adjust automotive gross profit margins to account for the cost of updating Tesla’s oldest vehicles, the Model S and X. as well as for the regulatory credits. Doing that, he said, would add another percentage point to gross profit margins.

Ferragu is a bull on Tesla stock, rating the shares at Buy. His target for the stock price is $900, far above the roughly $708 the shares were selling for on Tuesday morning. That is the same rating and target as Morgan Stanley analyst Adam Jonas, but Jonas sounds a little less enthusiastic than Ferragu. He called the results “noisy” in his research report.

Operating profit fell short of his expectations, he said, because of a weaker mix of sales. Tesla sold fewer high-price Model S and X vehicles ahead of its updating of both models. Higher costs associated with those updates also hurt profits, Jonas said, though he also noted that free cash flow was better than expected and that management said its orders for cars were the strongest ever.

Baird analyst Ben Kallo also focused on the bookings in a research report. “Management served several optimistic points on the call including those on current demand, margins, autonomous, solar/energy storage, S/X refreshes, and new factories in Austin/Berlin,” wrote Kallo. He maintained his Buy rating, but his price target for the stock is $736, lower than the $900 Jonas and Ferragu expect.

Other analysts were less upbeat. RBC analyst Joe Spak had a fairly lukewarm take, describing the result as an “uneventful quarter by Tesla standards.” He seemed impressed with Tesla’s ability to work through problems with its supply chain, but he also noted higher costs and that management moved back its forecasts for when new production facilities in Texas and Germany can ramp up operations.

Spak rates shares Hold and has a $725 target. J.P. Morgan analyst Ryan Brinkman is more negative, rating Tesla shares the equivalent of Sell with a $155 price target for the stock.

He correctly predicted that the stock would fall in response to the news, pointing out that the operating profit of about $600 million was short of the roughly $800 million Tesla had described as the consensus forecast.

According to Brinkman, the core auto business posted an operating loss after backing out more than $500 million in sales of regulatory credits and a $101 million gain on Bitcoin trading. Unlike Ferragu, he didn’t adjust the numbers to account for higher-than-expected costs to deal with parts shortages roiling the entire auto industry, as well as costs for updating the Model X and Model S vehicles.

The simple fact that earnings were higher than expected failed to lift the stock. The price is now up only about 1% year to date as investors wait for better news. It could be stuck near this level until some arrives.

Write to Al Root at allen.root@dowjones.com