Earnings season: Tesla drives through Q3 with another earnings beat

Equities
Investments

Despite supply shortages, Tesla comes out on top with another record-breaking earnings quarter.

Tesla earnings

Tesla’s headline stats

It’s another expectation-beating quarter for Elon Musk’s Tesla.

The electric carmaker was buoyed by record deliveries in Q3. This translated into higher net income and better margins. Tesla appears to have found chipsets no one else can locate, giving it the edge over its rivals as the world experiences a global computer chip shortage.

The key takeaways from Tesla’s Q3 2021 earnings are:

  • Earnings per share – $1.86 vs. $1.59 estimated
  • Revenue – $13.76 billion vs $13.63 billion estimated

In income terms, Tesla reported net income of $1.62bn. This is the second consecutive quarter the auto manufacturer has reached a $1bn income quarter. It only goes to show just how far Tesla has come. Last year, third quarter net income totalled $330m.

It was reported at the start of October that Tesla vehicle deliveries had outstripped Wall Street estimations. According to Tesla, it delivered 20% more vehicles against Q2 for a total of 241,300. Its Model Y and Model 3, more “affordable” cars, were the most popular models. Ultimately, Q3 vehicle deliveries were up 73% year-on-year.

Analysts had forecast that Q3 deliveries would stack up at 229,242 vehicles.

Gross margins improved from 26.6% overall and 30.6% for Tesla’s main automotive business – another record-breaking metric for Elon Musk’s brand.

Tesla also generated $806 million in revenue from its energy business, which combines solar and energy storage products, and $894 million in services and other revenue. Other revenue comprises maintenance, insurance and merchandise.

Tesla insiders show pre-earnings sell off

In a move that may signal something greater (but also maybe not), Tesla insiders began selling shares prior to the company’s third quarter earnings release.

As you can see from the below, Tesla company insiders have been releasing stocks. Over 450m Tesla stocks have been sold over the past 3 months, worth $7.1m. Compare that with buys of just 764,446.

Tesla inside earnings tool results.

Could this be part of a broader trend? Is Musk planning to sell some of his own Tesla holdings? It’s hard to say at this stage, but it’s worth keeping an eye on.

Tesla stock fell 1.5% in after-market trading. As of Thursday morning, the stock was still relatively flat, trading at $866.56. On the whole, Tesla shares are up around 23% across 2021.

According to the Markets.com analyst recommendations tool, Tesla holds a neutral rating.

Tesla analyst recommendations chart.

Contrasting with that is news sentiment which places Tesla in a firmly bullish position.

Tesla news sentiment rating.

Where next for Tesla?

Tesla is in the process of expanding its production capabilities with new factories under construction around the world.

“There’s quite an execution journey ahead of us,” Chief Financial Officer Zachary Kirkhorn said in the brand’s quarterly earnings call.

The centrepiece of its expansion plans is its Berlin “Gigafactory”. The $7 billion project could see cars start rolling off the production line in the next month, but there are still global parts shortages and high commodities prices to contend with.

This didn’t seem to really hold Tesla back in the third quarter. The EV builder seemingly has the ability to pull parts, chipsets, and micro components out of thin air.

“Q4 production will depend heavily on availability of parts, but we are driving for continued growth,” Kirkhorn said.

Also expect to see acceleration of the so called “Full Self-Driving Systems” Tesla is developing. As we reported yesterday, this new tech has its fair share of detractors, not least the National Highway Traffic Safety Administration. The self-driving technology is already under investigation by the NHTSA, and some Tesla fanboys/girls see this as an attack on the brand.

Others just don’t want to see a repeat of several fatal incidents caused by Tesla vehicles on autopilot. It’s imperative Tesla gets this right, otherwise there good be a major clampdown on its autopilot ambitions. But if people are getting hurt, or being killed, by wayward Tesla cars, it’s only right to take a cautious approach.

Let’s mention batteries. Tesla says it is about to make a switch to its standard-range models who currently use a lithium-ion battery with a nickel cathode. Tesla says it will start using a lithium iron phosphate (LFP) mix. Basically, iron is more abundant than nickel. It should make it easier for Tesla to source supplies.

The end goal, says Tesla VP of Powetrain and Energy Engineering Drew Baglino, is to localise battery and car production.

Some supply and critical safety challenges to overcome then for the world’s most valuable car maker.

S Q3 earnings season is in full swing. Stay tuned for more updates. In the meantime, check out our earnings calendar to see which megacaps are reporting and when.

Stocks look heavy, Barclays down despite beat, Unilever rallies on prices

Morning Note

Caution is the order of the day…European stock markets fell moderately in early trade as the risk-on rally that powered Wall Street to fresh all-time highs ran out of steam overnight. Major bourses –0.5%, with the FTSE 100 under 7,200 again and the DAX under 15,500. The yen rose and Japanese equities fell, leading a broad decline in Asian equities overnight as Evergrande shares resumed trading and promptly plunged 13%. US futures are lower after the Dow Jones industrial average recorded a fresh all-time high and the S&P 500 notched is sixth daily gain on the bounce as investors looked through inflation and central bank fears to better earnings.

The Dow rose to a record intra-day high of 35,669.69, but finished the day 0.1% off its record close, gaining 0.4% for the session. As noted here recently, it might just be that the market has passed peak in/stagflation worries, even if the situation is going to be evident in the real economy for many months to come. Earnings are generally beating expectations – 84% so far according to FactSet. As commented on last night, growth is stalled – the Atlanta Fed’s Q3 GDP estimate is down to just 0.5% from +6% in the summer; inflation is running at +5% at least – German producer price inflation is running above 14%; and the yield curve is inverting, but ‘stonks’ just keep on rising. Rates flattish close to multi-month highs today – as noted yesterday there has been some mild steepening in yields, 2s/10s at 1.25%, 5s30s at 0.96.

Travel stocks are doing a little better in early trade with IAG, EasyJet +1% after posting sizeable losses yesterday as the UK signalled it could reintroduce some restrictions, whilst rising case numbers will make the country less accessible to many foreigners.

Oil is a little lower this morning after moving to fresh multi-year highs overnight – WTI just a shade under $84, Brent hitting $86 a barrel. US inventories were bullish with big draws for distillates and gasoline. Global inventories still falling, India is again calling on OPEC to pump more. Reports indicate Exxon is debating abandoning some of its biggest oil and gas projects.

Tesla earnings beat expectations, but the stock fell. Insiders have been selling the stock ahead of the earnings release, which maybe tells you something. EPS rose to $1.86 vs $1.59 expected on a record revenue quarter. gross margins improved – 30.5% for its automotive business and 26.6% overall. Vice president of vehicle engineering Lars Moravy struck a more conciliatory tone about the NHSTA than his boss: “We always cooperate fully with NHTSA.”

Unilever products are just about everywhere in just everyone’s homes. So, when they raise prices it usually affects a lot of people. Unilever raised prices by an average 4.1% in the third quarter across all its brands, helping it to achieve underlying sales growth of 2.5% despite sales volume declining 1.5%. Turnover rose 4%. The company said it is taking action to “offset rising commodity and other input costs”. Share rose over 2%, delivering a boost to the FTSE 100.

Barclays said profits doubled in the third quarter as a strong performance at its investment bank and further reduction in Covid-era impairments boosted earnings. Attributable profit rose to £1.45bn, up from $611m for the same quarter last year. Return on tangible equity returned to a more normal 11.9% from the 18.1% in the previous quarter. Provisions for loan losses fell to £120m as the economic recovery continues to ease pressure on banks.

CEO Jes Staley touted “the benefits of our diversified business model” as Barclays posted its highest Q3 YTD pre-tax profit on record in 2021. Pre-tax profits at the investment bank rose a mighty 51% to £1.5bn, well ahead of expectations. Staley also pointed to consumer recovery and better rate environment. But does Barclays get enough credit for the investment bank earnings? Despite driving the performance in a fashion similar to some of the big Wall Street beasts it seeks to emulate, shares continue to trade at a hefty discount. Barclays trades at a price to book of about 0.5, whilst US peers are above 1, with BoA at about 1.5 and JPM closer to 2. But if investment banking revenues were not that sustainable and ‘can’t be counted on for future quarters’, why do it? Certainly they are more volatile quarter to quarter – revenues from equity trading, M&A and advisory fees cannot be counted on in the coming quarters to the same extent that mortgage fees and credit card fees might be. But discounting these entirely seems like a mistake by investors. Barclays rightly touts its more diversified revenue stream. When consumer and business growth markets are strained – like during the pandemic – volatility in financial markets creates a good environment for trading revenues to prosper. Barclays is reaping the benefits.

After a softer day on Wednesday, the dollar is a tad firmer this morning as risk is on the back foot. Yen also stronger. GBPUSD tests 1.38 support – daily candles suggest near-term top put in at 1.3830 area and maybe calling for pullback towards lower end of the rising channel. Hourly chart points to declining momentum. Test at 1.3740 for bulls.

GBPUSD Chart 21.10.2021

Tesla stuff, Squid Games

Morning Note

Tesla stuff: Haters hate, regulators regulate: don’t confuse the two. Duke University engineering and computer science professor Missy Cummings is set to become a new senior adviser for safety at the National Highway Traffic Safety Administration. Many Tesla fanboys and girls are crying foul. Cummings, a former pilot and robotics expert, is seen as ‘anti-Tesla’. Now that’s kind of interesting in the first place: you’re either definitely for Tesla or definitely a hater. No room for a middle ground. That’s kind of odd for a carmaker. Most people are not anti or pro Ford, or GM. They maybe like/dislike their cars, think they’re doing a good/bad job with the tech and think management are capable/useless. No one would say they’re anti-Ford. They might have an objective, rational view on the cars and/or the stock, but not a creed. But rational objectivity and Tesla seldom go hand in hand. And I’m not sure if you could say she’s anti-Tesla per se, just sceptical about the level of technology that is being touted around by some companies. But, particularly Tesla. 

 

For instance, last year she tweeted“LMAO…there is NO WAY Tesla will have a viable robo-taxi service this year. My lab has been running controlled experiments on Tesla Autopilot & I can say with certainty that they are not even close to being ready. My student on this project should get hazardous duty pay.”  In one 2018 tweet she said “The only killer robot out there is @elonmusk’s Tesla.” There are lots of examples on the feed.

 

It’s fair to say Cummings is a vocal critic of the ability of self-driving systems to cope with bad weather, and authored plenty of research that calls into question some of the main claims that companies like Tesla make when they market their ‘full self-driving’ systems. There are numerous papers, some choice tweets and essentially you can say she doesn’t buy the tech being anything like close enough to be objectively safe for the roads.  

 

After news of her appointment broke Elon Musk tweeted today: “Objectively, her track record is extremely biased against Tesla.”  

 

Tesla’s self-driving technology is already being investigated by the NHTSA. The company must provide the regulator with extensive data about its Autopilot system by Friday. Tesla has been getting away with marketing ‘Full Self Driving’ technology for a while; Cummings could mark time for a much tougher stance. Steven Cliff, deputy administrator since February, has also been nominated by the White House to lead the NHSTA. He’s currently in charge of the Tesla investigation. Another Tesla ‘hater’, according to many. Regulators are maybe finally going to regulate.

 

Meanwhile, in other Tesla ‘stuff’. Get a load of Elon Musk, who told a customer apparently not impressed with the look of the side mirrors on the cyber truck, that it’s OK to remove them. “They’re required by law, but designed to be easy to remove by owners,” he tweeted. I am ‘absolutely sure’ that is not irresponsible or unsafe…

 

Tesla earnings are due out today: the company hit record deliveries in Q3 as it found chips no one else seems to be able to find. EPS is seen around $1.50, on revenues of $13.6bn. Looking for updates on the Berlin Gigafactory, competition in China, internal chip production, Cyber truck and Semi releases, and, of course, the beta FSD progress. Let’s hope for some analyst questions around the NHSTA today.

 

Squid Games: Netflix posted solid subscriber growth in the third quarter of 4.4m, well ahead of the 3.84m expected. A deluge of hit new content that had been delayed by the pandemic is helping to drive interest such that the company anticipates 8.5m net adds next quarter. Earnings per share were a handsome beat at $3.19 vs $2.56 expected. In Q3, revenue grew 16% year over year to $7.5 billion, while operating income rose 33% vs. the prior year quarter to $1.8 billion. Content and subscribers are in good shape, but free cash flow remains elusive as it reported a second consecutive quarter of negative free cash. Still when you have low-cost, high margin content in multiple languages, you think Netflix will be able to drive non-US subscriber growth substantially in the coming years. Shares fell slightly in after-hours trade.

 

Markets: Stocks are flat again this morning in early trade in Europe, with the FTSE 100 hovering around the 7,200, looking like it has decent support.  The S&P 500 rallied three-quarters of one percent yesterday to close within 0.4% of its record high. Megacap tech had a decent day despite rising bond yields. If it’s stagflation then growth is still a premium.  

 

US 10-year rates rose to a 5-month at 1.67% as the Fed’s Waller said tapering should start in November and that if inflation keeps rising “a more aggressive policy response” might be required in 2022. Bitcoin at or around all-time highs post the ProShare ETF launch.

 

Inflation: UK inflation has fallen! But before we rejoice too much, it’s probably a one-off. CPI fell to 3.1% in September from 3.1% in August. The end of the Eat Out to Help Out scheme at the end of August last year, which led to restaurants raising prices in September, is a big factor. The surge in energy prices and ongoing supply chain problems are still expected to drive inflation to 4% this year. Moreover, the RPI rose 4.9%. 

 

As we said in yesterday’s note on Will the Bank of England actually raise rates in November?, the reading of the inflation print is important: the consensus remains firmly on the MPC voting to raise rates in two weeks’ time. But, as stressed in the same commentary, it’s not a slam dunk given the make-up of the MPC right now. 

Meanwhile, German produce price inflation surged – rising 2.3% month-on-month vs the +1% expected. That took the annual rate to 14.2%. Supply chain and capacity problems abound. Underlines that rising cost pressures are not going away. 

 

Sterling just eased back on the inflation miss. GBPUSD retreated to test the support offered at 1.3770, the OCt 15th swing high, where sits the 50hr SMA. Recent price action indicates this is the chief support before resumption of the uptrend, though we are less convinced that GBP can rally with rate expectations now they are baked in. However, I do see further dollar weakness likely to support further gains for cable following the topping pattern on the last 3 weekly candles.

EV stocks: legacy marques hit the electric accelerator

Equities

Tesla might be the face of electric vehicles, but long-standing manufacturers are matching its spending. Here are some EV stocks to watch.

EV stocks

2021 & electric vehicles

Electric vehicles really do look like the future.

Sales volume tripled year-on-year in H1, according to Woods Mackenzie research. WoodMac predicts 6 million electrically-powered vehicles will be sold by the end of 2021. That’s even with chipset supply constraints.

No year to date will have seen such internal combustion engine sales displacement should WoodMac’s forecast prove true.

We all know of Tesla’s electric vehicle market dominance. Many newcomers in the EV space are in danger of being left in Tesla’s shadow. While the likes of NIO and Li Automotive are attempting to put up a fight, as new brands go Tesla is driving far into the distance.

But what about legacy carmakers? These, in theory, have the supply chain capability, resources and existing market presence to potentially dwarf Tesla going forward. It’s only a matter of time before the sleeping or drowsy giants wake up and put their full industrial might behind EVs.

We’ve already seen the likes of Citroen and Volvo spin off their electric offer into new brands (DS and Polestar in this instance). Indeed, Polestar looks like it’s becoming very much its own entity and is even planning a $20bn SPAC IPO sometime soon.

Even Ferrari, which has resisted the call of pure electric power, for so long is following in the wake of luxury automakers Porsche and Aston Martin in offering a fully EV supercar by 2025.

But not all car manufacturers are created equal. There are those that dominate with their major global presence. These are the ones responsible for the global prevalence of motor vehicles to begin with. And it’s these that have enormous potential.

The largest automakers and conglomerates are pouring billions into electric vehicle research. Some are better prepared than others, but this level of investment can pay dividends in terms of positive stock price movements.

Traders and investors thinking about diversifying their portfolios with EV stocks may find some inspiration below.

Legacy EV stocks to watch

Ford

Henry Ford pioneered mass auto manufacturing as we know it. Now the company he started is keen to add his level of ingenuity to their model line-up.

Ford recently announced it was planning on spending $30bn on EV R&D by 2025 and expected 40% of its total sales to come from this market segment by 2030. Its goal is to launch 16 fully electric vehicles by 2022.

Pre-orders for the electric F-150, the truck that the company is essentially built on, have already reached 150,000. Oh, it also has plans afoot to invest $11.5bn in a battery-making facility to support the F-150 exclusively.

F-150 sales average 100 trucks sold per hour. Mr Musk with your Tesla Cybertruck: Ford is coming for you.

In terms of share price performance, Ford is up nearly 2% in day trading at the time of writing.

As well as its electric plans, Ford has been boosted across the previous months by its Q2 2021 earnings. During this time, the brand recorded a surprising $1.1bn profit, readjusting its earnings per share from a loss of $0.03 per share up to EPS of $0.13.

Ford raised its expectation for full-year adjusted earnings before taxes by about $3.5 billion, to between $9 billion and $10 billion.

Additionally, since CEO Jim Farley took control in October 2020, Ford’s share price has soared 113%.

General Motors

According to its website, General Motors plans to invest $35bn between now and 2025 towards creating a fully electric future.

With this 30% rise in dedicated electric vehicle spending, the US’ number one carmaker certainly has Tesla and other rivals squarely in its crosshairs.

In practical terms, this means a complete model overhaul and construction of dedicated production facilities. That includes two new battery megafactories. One of these is already underway in partnership with Korea’s LG Energy Solutions, while another site is being prepped in Tennessee.

GM confirmed in November it would speed up the rollout of new EVs, with plans to offer 30 models globally by 2025, up from a prior target of 20 by 2023. Chief Executive Mary Barra said the automaker wants to exceed annual sales of 1 million EVs in the United States and China by 2025.

General Motors also recently announced it plans on investing $300m into Chinese auto-pilot developers Momenta to help grow develop self-driving technologies. This could also help GM get its own slice of the lucrative Chinese automotive market – the largest in the world.

In terms of share price outlook, Goldman Sachs recently came out as saying it thinks GM is undervalued.

“General Motors (NYSE:GM) is seen as an attractive stock that captures the benefit from an industry recovery in production as well as opportunities to benefit from EVs and advanced driver-assistance systems,” Goldman analyst Mark Delaney said.

GM started the week on a good footing, rising 2.25% on Monday 27th September. It has subsequently flattened but there are reasons to look at the stock in a bit more depth.

Its E/P ratio of 6.04 makes it undervalued. Additionally, analysts expect its earnings to fall by 5.3% this year before rising at an average annual rate of 13.25% over the next five years. Might be worth a look in the short term.

Volkswagen

Volkswagen’s own spending plans dwarf those of the American rivals above.

Across the next five years, the Wolfsburg-based marque will have spent $86bn on a fully comprehensive overhaul of its production capabilities and model collection. Looking further afield, it plans to make 70 fully electric vehicles by 2030.

231,600 VW EVs were sold in 2020. It has plans to double that to 500,000 by the end of 2021. Adding in plug-in hybrid models, overall sales target for vehicles involving some modicum of electric power comes to 1.5m.

VW also has its eyes on the Chinese prize. It has announced it is launching its ID.3 and ID.4 models in China soon. The ID.4, an electric SUV, will be key to Volkswagen’s Asian expansion plans as this particular car style is a favourite amongst Chinese consumers.

The company’s stock has increased 120% from 2018 up until now, although Forbes believes it is currently reaching the limits of its mid-term potential.

Future earnings will be key in accruing decent performance for VW.

Forbes’ breakdown of the FY2022 outlook is as follows:

  • Revenues – €254 billion
  • Net income – €13.8 billion
  • EPS – €2.75
  • Stock price valuation – $47

Of course, VW’s work also includes that of Audi which is launching its own range of luxury EV models. All of its eggs are currently in one big electric basket, but it could pay off as the world moves away from fossil fuels.

Stocks pick up some bid after textbook S&P 500 bounce

Morning Note

European stock markets were modestly higher on Thursday after a rebound in the US and another dip for Asian equities overnight. Hong Kong down 1.7% as casino stocks fell again, and is now testing the lows struck in July and August, down about 20% from its Feb peak. Indebted real estate group Evergrande fell another 7%. Gold struggled to hold the $1,800 level as Treasury yields climbed a touch. The dollar is a bit stronger after yesterday’s decline. 

 

FTSE 100 in the middle of the range after the decline of last week. Industrials and healthcare to the top, basic materials the only sector in the red. Ashtead is the top gainer, up 3%, after reporting Q1 revenues of £1.85bn and said it sees the full-year performance ahead of previous guidance. The company now expects growth of 13-16%, ahead of the 6-9% prior guidance. Rolls Royce also rallied 3% after the UK struck a security deal with Australia and the US to help supply the former with nuclear submarines. BAE Systems, another mentioned in the press statement from the government, also rose.

 

Buy the dip: The S&P 500 rallied 0.85% as it found support once more at the 50-day simple moving average, taking it back to where it was a month before – still down almost 1% MTD. The bounce off the 50-day line was pure textbook. Mega cap growth delivered, but cyclicals also got a boost as breadth was solid. Microsoft did some serious heavy lifting after announcing a mega buyback programme. The company will launch a share buyback programme of up to $60bn and raise its quarterly dividend by 11%. A mild gain for MSFT added almost 5pts to the S&P 500, even more to the NDX. Energy led the sectors with a gain of almost 4% as oil prices continued their ascent. Natural gas made another 8-year high. 

 

We’ve digested a couple of inflation readings this week and it’s clear it’s stickier than central bank Panglosses told us. It comes to down to there being too much money – aka liquidity – and not enough stuff to match. People can moan about the supply chain problems and labour shortages, and claim ‘there’s nothing the Fed can do about bottlenecks at ports, or ‘what can central banks do about chip shortages?’, but this is all about the inflationary environment unleashed by governments and central banks through their printing vast sums of cash during the pandemic and failing to suck it all back in afterwards. Instead, they run it hot in the vain quest for jobs when there are plenty of jobs out there, and let inflation get higher to eat into any wage growth and make people poorer. Meanwhile the asset rich get richer. 

 

I talked about this in May, referring to comments made a year before: “Ultimately it goes back to the question asked by the great Paul Tudor Jones about a year ago: can the Fed suck all this money back out of the system as quickly as it injected it. The answer then was almost certainly no, and post the recent policy shift and vast pro-cyclical stimulus it is clearly absolutely no. So we have inflation worries and, as described on multiple occasions last year, the worry is that the Fed allows inflation expectations to become unanchored as per the 1970s.” 

 

Briefly: 

 

Ray Dalio on Bitcoin – if it gets really successful, they’ll kill it and they have ways to kill it. Neatly sums up my long-standing position. Price higher today, but the rally off the Monday dip is losing momentum as it runs into near-term resistance around $48,500.

 

Bank of Japan boss Kuroda – If necessary, BOJ will further relax monetary policy such as by reducing interest rates. The comments ahead of the government’s first cut to its economic outlook in 4 months. USDJPY steady around 109.30 after touching its weakest since Aug 17th yesterday.

 

Cathie Wood reducing Tesla exposure: A $3,000 price target on the stock, but Ark Investment Management has sold more than a million shares in Tesla in the last 5 months, according to a Bloomberg report. 

 

WTI is holding onto gains after briefly rising above $73 after the EIA reported US inventories fell by 6.4m barrels last week, though the impact of Hurricane Ida is to blame.  

Risk on to start the week as inflation looms

Morning Note

Stocks are trading a tad firmer in the early part of the session, after a toughish week. US indices fell for a fifth straight day on Friday, weighed down by Apple’s setback, the stock falling over 3% after a court dealt a big blow to its app store payment model. Tesla shares fell 2.5% after Cathie Wood’s Ark group sold down its holdings. More than a whiff of mega cap tech/growth fading – question is whether we get the rotation into cyclicals to keep the market grinding higher. Dip buyers failed to come in last week so looking perhaps to see whether there are further losses to come. Futures are this morning trading in the green. Meanwhile inflation is still a problem, with US producer prices rising 8.3%. China’s regulatory crackdown on big tech continues, with Beijing planning to break up Ant’s mobile platform Alipay, sending Alibaba shares down 5% in Hong Kong and the broader Hang Seng down by 2%. 

 

Nevertheless, there is a mild risk-on feel to the start of the new trading week. The FTSE 100 is up half of one percent after it tested the 7,000 support last week, which has held for now. The index is slap in the middle of the range it’s treaded since April, failing to break out in any meaningful way. Utilities, energy and financials doing the lifting this morning, with Royal Mail and National Grid at the top of the leader board. ABF fell to the bottom despite raising its profit target for the year on improved margins as supply chain problems hurt sales. SThree shares jumped another 6% after it also said profits would be ahead of expectations – staffing shortages playing into the hands of recruiters.

Inflation ahead

Stagflation: The US PPI reading for August was hot, with prices up 0.7% month-on-month and sending the annual increase to 8.3%, the biggest since records began in 2010. Whilst some may argue that this is transitory, and due to supply chain bottleneck, shortage of vessels etc etc, and therefore ‘nothing the Fed can do about it’, you have to ask yourself whether expansionary monetary policy is actually doing more harm than good right now.

 

Light day for data so all eyes on the US consumer price index tomorrow. The key inflation reading for the month of August is set to come in at 5.3%, according to consensus. In July, inflation steadied at 1 13-year high of 5.4%. Core inflation rose 4.3%. But there was some moderation in the month-on-month increase, with core at +0.3% vs +0.9% in June. Vehicle prices have been one of the main drivers of the increase, but the pace of price increases slowed almost to a halt in July. A hotter-than-expected reading tomorrow could see the market adjust its view of when the Federal Reserve begins tapering asset purchases. Cooling in inflation pressures would be positive for market sentiment.

Oil prices advance

Crude oil prices are firmer with WTI (spot) nudging its head above $70 again. Supply remains affected by Hurricane Ida. OPEC is due to release its monthly outlook later today. In FX, the dollar is firmer, with the euro dropping to its weakest since the end of August. GBPUSD is just about holding on to 1.38. Hard to talk meaningfully about FX trades right now with everything so range bound and trading sideways. Elsewhere, Bitcoin is lower again around $4k and chart action looks dicey. 

Tesla share price worth $3,000 ‘if they execute really well’

Investments

Tesla boss Elon Musk said in an email to staff that the stock could be worth $3,000 per share if the company achieves all its aims.

Musk told employees he agrees with Ark Invest’s ‘valuation’ as long as the company executes “really well”.

The company’s stock was last trading around $733, implying a roughly 300% improvement. Ark is a long time investor in Tesla and is very bullish on the stock.

Watch our interview with Stanphyl Capital’s Mark Spiegel, a long-term Tesla bear, talking about the reasons why he’s still shorting the stock.

Tesla is facing scrutiny over its Auto Pilot system after a number of crashes, many fatal, which has led to an official investigation by regulators. Meanwhile, it’s struggling on the production side with the Cybertruck launch pushed back to late 2022 and the launch of its second-generation roadster also delayed.

Analysts remain split on the path the Tesla share price will take:

Tesla analyst sentiment 06.09.2021

Tesla share price recommendation 06.09.2021

Are EV stocks running out of juice?

Equities
Investments

With some EV stocks running into the red, we take a look at the sector to see if it’s electric vehicles’ time to step on the gas or hit the accelerator.

EV stocks

Electric vehicle stocks drop

Several electric vehicle stocks were running out of juice at the start of the week.

Chinese stocks, such as Xpeng, Nio and Li Auto all started trading poorly, although it should be noted that Xpeng and Li are both up 0.93% and 1.01% respectively at the time of writing. Nio remains down 1.37%.

Even Tesla, Elon Musk’s shining beacon of electric vehicle innovation, is subdued, down 2.96% in pre-market trading on Wednesday 18th August.

But why?

In the case of Tesla, a new NHSTA probe into the safety of the carmaker’s autopilot system has once again caused a wobble in its share price. The agency highlights 11 crashes that occurred when Autopilot or Traffic Aware Cruise Control systems had been engaged. In fact, Tesla has been under NHSTA investigation since 2016.

Not a great look when Tesla is attempting to position itself as an AI innovator as well as an EV champion.

Nio is also under the crash cosh. A prominent Chinese entrepreneur was tragically killed while testing a Nio ES8 equipped with automatic motorway lane changing software.

Such measures are meant to remove the human element in order to boost safety. Naturally, there will be teething issues if that’s not too glib a term at this early stage in development. But if said features are resulting in car crashes and a loss of human life, then EV stock prices are going to fall. Investor confidence is everything, after all.

Then there are supply chain and logistical considerations to consider. The worldwide computer chip shortage has impact production and vehicle delivery numbers for pretty much all car manufacturers. That includes both internal combustion-powered and electric vehicles.

If you’re unable to build and deliver cars in line with demand, your revenues will probably fall and take your share price with it.

Even companies like Tesla, which delivered a record number of vehicles in the last quarter, will feel the pinch going forward. Developing and manufacturing proprietary chipsets was ruled out by Tesla CEO musk as being too costly.

Can you still ride the EV boom?

Of course. The fact is electric vehicles are pretty much guaranteed to be the future. Even if the course steers ICEs to hybrids to fully electric vehicles, the world is moving away from fossil fuel power.

The UN’s Code Red climate report could precipitate a more rapid move to EVs. We’ve also seen plenty of mandates from the EU, UK and now the US to force legislation toward a purely electric-powered future.

The Biden Administration, for instance, is pushing for half of all new vehicle sales to be EVs by 2030. Similar directives are in place in Britain and the European Union.

EV marques are doing their best to improve their offers. Tesla has committed to a massive expansion programme of new mega factories and updated models. Xpeng has plans afoot to double its annual production capabilities from 100,000 to 200,000 vehicle deliveries per year. It’ll be expanding its line-up to include a new SUV too – a car class that’s a favourite of the Chinese middle class.

The appeal of EVs is still strong for institutional investors. A number of banks and investment firms have upped their holdings in Chinese manufacturers for instance, including:

  • Baillie & Gifford – Now holds 14.83m shares in Li Auto
  • Goldman Sachs – Now holds 21.44m shares in Nio
  • Fidelity Investments – Now holds 13.35m shares in Xpeng

With any major sector, however, you can’t just look at one segment, no matter how large it is. Electric vehicles rely on a massive ecosystem of battery suppliers and chipset/semiconductor manufacturers. It’s here where canny traders and investors may be able to diversify their portfolios when looking at EV stocks.

Analysts have identified several stocks that could offer strong upsides as the electric vehicle industry expands.

These include:

  • NXP Semiconductors – This company derives half its annual revenues from the auto industry
  • Skyworks Solutions – Has plans afoot to greatly expand its EV offer after purchasing peer Silicon Labs’ auto and infrastructure segment
  • TE Connectivity – Swiss censors firm recently posted a 52% year-on-year increase in revenues, totalling $3.8bn. EPS came in at $1.79.
  • Aptiv – Ireland-based vehicle components manufacturer has a market cap of $44bn and generated $13 in revenues across 2020.
  • Freeport-McMoRan – An Arizona-based mining firm with a speciality in copper, Freeport-McMoRan represents the wider infrastructure needed to build electric cars. It has plans to invest in growth projects, which prompted Deutsche Bank to rate the stock as a “buy” in July.

This is just a small snapshot of the types of stocks that could thrive in a world dominated by electric power.

So, while EV stocks are currently on a bit of a negative trajectory, this could all very well change as the industry progresses. It’s one segment to watch closely in the future.

European indices slip after weak Asian handover, Wall St hits new high

Morning Note

Stocks are down in early trade on Tuesday after European markets finished lower yesterday, with the FTSE 100 leading the decliners with a fall of almost 1% to around 7,150. The DAX finished off 0.5% at a whisker below 15,900. They were off around 0.3% and 0.6% respectively this morning before paring losses. Concerns that growth has peaked is worrying investors – today’s BofA European Fund Manager Survey showed just 44% think the European economy will further improve over the next 12 months – the lowest since last June and well down on the 80% last month. Rising covid concerns and inflation worries are the main culprits. Nevertheless, FMs are still bullish on European stocks and think there is still room for the inflation trade to run. It’s mirrored in the Global FMS which shows global growth expectations cut to net 27%, the lowest April 2020 and profit expectations are the weakest since last summer. After peaking at 62% in April, global equity allocation has slipped to 54% though there is ‘no appetite to rotate into bonds’.

 

US stock markets managed to shed any negativity around cyclicals with mega cap tech doing the heavy lifting to take the S&P 500 to a new record, rising 0.3% on the day. The Dow Jones erased an early decline of more than 200pts to finish up by more than 100 for the session. Futures are however pointing to a weaker open after a weak session in Asia, as further tightening of China’s competition rules left tech shares in the doldrums. The Hang Seng declined 1.8%, whilst shares on the mainland dropped around 2%. 

 

ARK’s Innovation ETF declined 2.6% as Michael Burry of Big Short fame disclosed a short position on the fund. Now it makes sense given the kind of momentum plays Cathie Woods has been in. And we know Burry has had a short on Tesla since the start of the year, which is the biggest holding in the ETF. Burry is still mega short Tesla so seems to be doubling down on his bearish momo bet. Scion Asset Management bought 2,355 put contracts and increased his bet against Tesla – 10% holding in the ARKK fund. 

 

Tesla shares fell more than 4% as the company faces a formal government investigation into its Autopilot driving system. In a post Monday, the National Highway Traffic Safety Administration announced it has identified 11 crashes since 2018 involving a Tesla vehicle either on Autopilot or Traffic Aware Cruise Control. The investigation covers the models Y, X, S and 3 from 2014 through to 2021 model years. 

 

Big changes at BHP: Shares popped 8% in London, adding a full 14pts to the FTSE 100, as it announced it’s out of petroleum, into potash and scrapping its dual-listing structure. Performance over the year was very strong as BHP benefitted from a global commodity boom and economic recovery. Profit from operations rose 80% to $25.9 billion, up 80%, while underlying EBITDA hit $37.4 billion at a record margin of 64%. Attributable underlying profit rose to $17bn from $9bn last year. The board also announced a $2 final dividend. Elsewhere on the FTSE, JustEatTakeaway shares rose after it reported revenues rose 52% to €2.6bn in the first six months of 2021, compared with €1.8bn in the first half of 2020. 

 

The Empire state manufacturing index was weak – coming in at 18.3 vs the 29 expected, way down on the record high 43 last month, albeit activity is continuing to expand. The usual inflation warning flashed red as the survey reported that input prices continued to rise sharply, and the pace of selling price increases set another record. The prices received index climbed seven points to 46.0, setting a record. Another growth has peaked, inflation is here to stay type report.

 

Taper talk: The picture is almost complete. Chiming with the views of a number of Fed officials aired over the last fortnight, Boston Fed President Eric Rosengren said it would likely be appropriate to start tapering bond purchases in the autumn, though the timeline for raising rates is still uncertain and dependent on the labour market recovering. It’s increasingly clear there is a broad consensus for the Fed to announce its taper in September (or at Jackson Hole), and to commence in November. Of course, there are dissenters, and some doves may prefer to wait longer. The key to it all is Jay Powell – his town hall event tonight (18:30 BST) will be closely monitored for any signals. Even if there is broad agreement to taper the Fed still faces a question of whether to go early and slow, or later and fast. And as soon as the Fed sets the timeline for tapering the market will swivel its focus to the timing of the first rate hike, which is when we start to see some bond market action again.  The BofA FMS shows 84% expect the Fed to taper this year but lift-off for rates not until 2023 with risks around the Delta variant, asset bubbles and China growing as risks.

 

OPEC+ sees no need to pump more oil into the market now beyond what is already intended despite US calls to open the spigots, according to four OPEC+ sources. Nevertheless, the cartel is increasing output: Platts says OPEC’s 13 members pumped 26.83m bpd in July, up 640k bpd from June. API inventory in focus later today after the EIA said US shale output is on the rise, expected to hit 8.1m bpd in September. WTI (Oct) trades at $66.50 this morning, a little off yesterday’s lows around $65.50, but the bears are still in control. 

Earnings season: Tesla steps on the gas with earnings beat

Equities

Tesla once again posts strong quarterly earnings figures and clears some major milestones.

Tesla earnings

Tesla’s headline stats

Released yesterday after US market close, Tesla’s Q2 2021 earnings beat Wall Street expectations.

The world’s foremost electric fortunes surged this quarter. Net income for 2021’s second quarter reached $1.14bn – surpassing the $1bn mark in a quarter for the first time. It’s also a ten-fold increase against Q2 2020’s net income levels.

Revenues generated from Tesla’s core automotive business clocked in at $10.21bn. Total revenues reached $11.96bn – nearly double the $6.04bn registered a year ago.

The company broke its previous vehicle delivery records too. Deliveries, a metric akin to sales when gauging Tesla’s success, amounted to 201,250 in the quarter ending June 30th 2021.

Production volumes stood at 206,421.

While the vast bulk of its revenue stream came from vehicle sales and associated services, Telsa also made money selling its government-sourced regulatory credits.

Regulatory credits are awarded to manufacturers as an incentive to develop electric vehicles. As Tesla only manufactures EVs, it gets these for free, which it then can sell on for a massive profit to other marques that have yet to meet regulatory requirements.

Sales of regulatory credits contributed 3.5% of revenues, equating to $354m.

Servicing looks like it is becoming a major money spinner for Tesla. With more vehicles on the roads, some 121% year-on-year, Tesla has boosted its service offer. It now operates 598 stores and service centres worldwide. According to its latest reports, service and maintenance generated $951 million this quarter.

One aspect where Tesla took a hit was its Bitcoin holdings. You may recall, the automaker caused consternation earlier in the year, when it snapped up $1.5bn in BTC tokens in March. Questions were raised around the validity of this strategy: is Tesla an auto manufacturer or a crypto trader?

CEO Elon Musk is famous for his enthusiasm for cryptocurrencies. However, he and his company were instrumental in instigating one of BTC’s famous price wobbles. First Tesla announced they were going to accept Bitcoin as payment for its vehicles in May. A week later, the company reneged on this, citing environmental concerns.

A $23m impairment on the value of Tesla’s BTC holdings was noted in this quarter’s report. This was filed under a “restructuring and other” operating expense.

Tesla’s post-earnings share action

Tesla shares rose 2% in after-hours trading following the earnings release.

As of Tuesday, pre-UK lunchtime, Tesla was trading for around $648 per share.

EPS beat Wall Street estimates. Forecast at $0.98, real earnings-per-share was valued at $1.45.

Upon this Street-beating report, sentiment on Tesla is naturally very positive.

Tesla senitment indicator.

Analyst recommendations rate Tesla as a “buy”.

Tesla analyst sentiment.

Where next for Tesla?

Despite having a bumper Q2, there still remains lots of challenges for the brand.

The largest is the global shortage of chips necessary for EV production. Volume production will be limited, Musk said on a call with investors yesterday, depending on whether supply shortages can be overcome.

This year, Tesla is aiming to boost deliveries by 50%.

Despite market suggestions, Musk dismissed ideas of Tesla setting up its own chip hub. “That would take us, even moving like lightning, 12 to 18 months,” he said.

Tesla claims it is on track towards building its first Model Y models in new facotires based in Berlin, Germany and Austin, Texas. Model Y cars should start rolling off production lines in these locations by the end of 2021.

However, the launch of its commercial semi-truck programme has been delayed. This is again due to supply chain snags, specifically the availability of battery cells.

No indication was given by Tesla as to when it will start production of its futuristic Cybertruck pick up platform.

Essentially, the next months will rely on the global chip status. Rising input costs in US and European plants, caused by rising worldwide commodities prices, may put the brakes on rapid expansion as the year progresses.

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