Why Tesla Shares Jumped 11% Despite Earnings Plunged 55%
It is no secret that Tesla, both as a business and in its stock performance, has not met expectations. Reports of Tesla cutting prices, production challenges with the Cybertruck, and the absence of a new model to succeed the aging Model 3 have surfaced repeatedly. Consequently, its stock price has fallen 42% year-to-date, making it the worst performer among the S&P 500 index stocks.
Some investors are beginning to wonder if there's an opportunity, especially when a "Magnificent 7" stock is so heavily beaten down—could the reaction be overblown?
It seems that it was, at least after the release of Tesla's results. The company's share price surged by 11% during after-hours trading.
Tesla's 1Q24 financial results have been underwhelming, revealing the impact of competition and price cuts on its performance.
Revenue fell by 9%, significantly affected by a 13% drop in sales from the automotive segment—a clear indicator of increased competition. Additionally, gross margins contracted by 18%, likely due to price reductions.
These factors contributed to a 55% decline in net earnings, falling short of analysts' expectations.
Perhaps most concerning is the sharp decrease in operating cash flow, which plunged to just $242 million in Q1 2024, down from an average of $3.3 billion over the previous four quarters. As Tesla has been maintaining its capital expenditures, its free cash flow turned negative, hitting -$2.5 billion.
Given this set of results, how can Tesla shares rise? What gives?
There are a couple of possible explanations.
Firstly, as previously mentioned, some investors might perceive the "Mag 7" stock as excessively beaten down and view it as a viable candidate for a rebound. Since poor results were anticipated, Tesla faced a relatively low threshold for performance. As long as the results were deemed acceptable by investors, they had a rationale to buy the stock.
Regarding the issue of a quarter with negative free cash flow (FCF), it's important to note that Tesla still has a substantial cash reserve of $27 billion. If this amount were invested in treasury bills with a 5% yield, it could generate over $1 billion in interest income. This potential revenue could effectively double its profits for the fourth quarter of 2024.