Thursday, July 23, 2020

Tesla Races Ahead with Q2 Results, Eyes S&P 500 Entry

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News shaping
the markets today

     

What’s happening: Shares of Tesla Inc. gained over 4% in extended trading on Wednesday after the electric car manufacturer surprised investors by reporting a profit for the second quarter.

What happened: Tesla’s production had suffered to some extent during the second quarter, with its factories being forced to remain closed due to the coronavirus outbreak.

Despite the setback, the Palo Alto, California-based company managed to generate a profit, opening the probability of its stock joining the S&P 500 index. Analysts expressed concern, however, regarding the epic rally in Tesla’s stock this year.

How were the results: The automaker reported its sales for the quarter ahead of expectations and swung to a profit in the second quarter.

  • Sales declined 5% to $6.04 billion, from $6.35 billion in the same quarter last year. Despite the decline, the figure came in higher than the consensus view of $5.15 billion.
  • Tesla posted a profit of $104 million, or 50 cents per share, versus a year-ago loss of $408 million, or $2.31 per share.
  • Excluding onetime items, earnings were recorded at $2.18 per share, compared to a year-ago adjusted loss of $1.12 per share. The figure was much better than the consensus expectations of an adjusted loss of 2 cents per share.

Why it matters: Earlier this month, Tesla had announced better-than-expected deliveries, despite its US factory in California being closed for most of the quarter due to shutdown orders by the government.

The announcement triggered a stock rally, sending Tesla’s market capitalisation to about $300 billion, far ahead of Japan’s Toyota Motor. The company’s shares had surged to an intraday high of $1,794.99 on July 13.

With the latest quarter’s results, Tesla has reported profits for four consecutive quarters, meeting a condition required for its stock being included in the S&P 500 index, which could happen over the next few months.

Tesla said it plans to continue building capacity for Model Y and is on track to begin sales of the compact SUV from its Berlin and Shanghai factories in 2021.

Management did not issue any guidance for 2020 citing uncertainty around the pandemic. Tesla reassured investors saying, “We have the capacity installed to exceed 500,000 vehicle deliveries this year, despite recent production interruptions.”

Even with this aggressive target, the company would be catering to less than 1% of the global auto market, analysts from BofA Securities said in a report. They believe Tesla's fundamentals are not yet stellar, although the company has executed well amid the pandemic. The analysts added that the stock “appears overheated” and the share price is no longer supported by fundamentals.

How shares responded: Tesla’s shares gained 4.1% to reach $1,657.00 in after-hours trading following the release of strong quarterly results, after closing the regular session higher by 1.5%. The stock has climbed around 300% this year, versus a 1% gain in the S&P 500 and a 6% decline in the Dow Jones index.

What to watch: With Tesla saying that it will meet its delivery target for the year, investors will continue to look out for news related to economic recovery in the company’s key US and China markets as well as any production disruption at its factories. Markets remain cautious, as the company’s factories in the US are in California, Nevada and Texas, which are currently the covi-19 hotspots.

The Markets Today

     

The British pound will be in focus today, ahead of a basket of economic reports from the UK.

Context: The Sterling slipped from its six-week high on Wednesday, with investors dumping riskier currencies amid mounting tensions between the US and China.

Details: China disclosed yesterday that the US administration had ordered a shut down of its Houston consulate. Beijing strongly condemned the latest move, threatening retaliation.

Investors await news related to Brexit discussions with concerns over the UK abandoning talks.

The sterling breached the $1.27 level on Tuesday for the first time since June 11 on optimism surrounding positive data from potential coronavirus vaccines and the European Union leaders agreeing on a massive covid-19 rescue package.

On Wednesday, however, the GBP/USD pair spent most of the session lower, but recovered later in the day to settle at $1.2733.

What to watch: Investors await data on industrial trends orders and business confidence from the UK. The Confederation of British Industry's total order book balance, which stood at -58 in June, is expected to rise to -38 in July. The CBI's quarterly index of manufacturing optimism declined to -87 in the second quarter, compared to +23 in the earlier three-month period.

Markets will also continue to assess the coronavirus numbers, with the total cases exceeding 15 million globally.

Other Markets: US indices trading closed higher on Wednesday, with the Dow Jones index, S&P 500 and Nasdaq 100 up by 0.62%, 0.57% and 0.24%, respectively

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

Germany’s GfK consumer sentiment indicator, France’s manufacturing industry climate indicator and business climate indicator, UAE’s money supply, Eurozone’s consumer confidence indicator as well as the US initial jobless claims, EIA’s natural gas stockpiles and Kansas City Fed's manufacturing production index.