Electric car maker Tesla (TSLA -0.76%) surprised investors over the weekend when it reported stronger-than-expected vehicle deliveries despite a tough macroeconomic environment. The news sent the stock soaring higher. While many analysts responded to the upbeat report with upbeat sentiment about the stock, some were more cautious. The growth stock’s mixed reviews from analysts boil down to one primary factor: Though Tesla’s sales are soaring, it’s had to cut prices dramatically to do this.
Following Tesla stock’s big move higher this week and its staggering year-to-date gain of more than 120%, it may make sense for investors to take some profits. A huge increase in vehicle deliveries is great, but the hit to its bottom line the company will have to stomach to achieve this growth deserves more recognition. Indeed, one analyst even urges investors to consider the idea that Tesla may have to reduce vehicle prices even more going forward.
Surging deliveries
Tesla delivered about 466,000 vehicles in the second quarter. This was a record for the company, up 83% year over year and 10% sequentially. Furthermore, the strong quarterly results put the company closer in line with its goal to grow annual deliveries at a rate of around 50% year over year. Because of the strong quarter, Tesla’s trailing-12-month deliveries have risen 47% year over year.
While analysts were expecting Tesla to report record quarterly deliveries, the consensus analyst estimate was well below 466,000. On average, analysts had forecast Q2 deliveries closer to 446,000.
Plummeting prices
Many analysts expressed optimism for the stock following the report. But analysts from JPMorgan, Oppenheimer, and Guggenheim expressed concerns about pricing trends. The three analysts noted recent price reductions are weighing on revenue per vehicle and overall profitability. Oppenheimer analyst Colin Rusch even warned that Tesla could lower prices even more.
Tesla aggressively cut prices on its vehicle models around the beginning of the year, with some models getting price reductions of around 20%. The move helped combat the impact of higher interest rates on monthly car payments. But with the Federal Reserve saying this week that it intends to raise interest rates even more, consumers’ willingness to obtain a loan for a vehicle purchase could subside even more. If this translates into subdued demand-growth trends for Tesla, the company could lower its prices even more.
The downside to price decreases, of course, is significant. Though it can help boost delivery volume, it’s unlikely to generate high enough incremental volume to aid profits. Indeed, price cuts during Q1 led to Tesla’s net income falling 24% year over year. Furthermore, the consensus-analyst estimate currently calls for Tesla’s full-year earnings per share (EPS) to decline about 16% year over year as price cuts weigh on profitability.
Given this caveat to Tesla’s recent report of better-than-expected deliveries, and considering the stock’s big run-up, it may make sense for investors to follow Guggenheim analyst Ronald Jewsikow’s advice and sell into the stock’s strength ahead of Q2 earnings. As he notes, the stock’s stretched valuation may be “overly demanding” at its current level. On the other hand, given Tesla’s extraordinary execution in the face of a difficult macroeconomic environment, investors may want to at least hold onto some shares, keeping their position small as a percentage of a diversified portfolio.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends JPMorgan Chase and Tesla. The Motley Fool has a disclosure policy.
