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Will Deliveries Miss, Recession Dampen Tesla's Growth Outlook?

Published 03/10/2022, 19:00
  • Tesla's deliveries fell short of Wall Street's forecast of 364,660 vehicles, sending the stock tumbling
  • However, numbers are still at record levels, signaling another strong earnings report this month
  • Goldman Sachs reiterated its buy rating on Tesla despite the miss
  • In a market in which risk aversion is the name of the game, Tesla Inc (NASDAQ:TSLA) has performed remarkably well for a stock with its fundamentals.

    The strength has mainly resulted from the company's impressive performance in navigating supply-chain challenges and the highest inflation in four decades. During the past two years, the Austin, Texas-based company consistently smashes its previous car delivery records despite the widespread shortage of semiconductors, labor, and parts—a myriad of challenges that idled rivals' plants for months.

    The latest test of Tesla's execution and delivery capabilities came over the weekend when the company released its third-quarter car delivery report.

    Despite falling short of Wall Street's bullish forecasts of 364,660 vehicles, Tesla's vehicle deliveries rebounded to a record 343,830, up from about 255,000 in the prior quarter when a temporary shutdown of its factory in China hurt output.

    Quarterly deliveries are among the most closely watched indicators underpinning the carmaker's financial results.

    Tesla signaled the delivery shortfall reflected changes it is making to its processes which, it said, "led to an increase in cars in transit at the end of the quarter." The adjustment, the company said, was necessary because as production volumes grow, vehicle transportation capacity is "becoming increasingly challenging to secure" at a reasonable cost.

    This delivery miss, however, is hurting Tesla shares, down more than 8% at the time of writing. Tesla Weekly Chart

    Concerns are that demand could weaken amid global economic turmoil, making it more challenging for Tesla to meet its annual production target of 50% output growth.

    Long-Term Growth

    It'll certainly be hard for Tesla to shield itself from the impact of a full-blown recession. However, there are still many strong reasons to believe that the company is among those tech stocks which should be on your buying list to take advantage of the bear market weakness.

    The biggest one is that the EV story is still in the early stages of its growth, and Tesla's challenges are mostly tied to enhancing production and not generating demand. Due to this unique positioning within the auto industry and the cult following that its products enjoy, Tesla stock will likely remain well-supported in a possible recession, in my view.

    Highlighting these advantages, Goldman Sachs maintained a buy rating on Tesla stock this morning, saying that the company will continue to benefit from the long-term shift to electric vehicles. The investment bank said in a note to clients:

    ″[We] believe the company remains well positioned to drive solid volumes and margins/FCF going forward, and the vehicles in transit issue is a mitigating factor for the 3Q delivery miss."

    Assuming demand for Tesla's cars remains strong, helped by global incentives for the EV industry and higher prices at pumps, a recession can also resolve many issues the company is facing now that hamper its growth. In such a scenario, commodity prices—steel, aluminum, and copper—will decline, and labor costs will fall.

    Musk told shareholders last month that he is seeing such deflationary trends taking hold:

    "The interesting thing that we're seeing now is that most of our commodities, most of the things that go into a Tesla—not all but more than half—the prices are trending down in six months."

    However, having a solid long-term growth potential isn't enough to save Tesla investors from the extreme volatility, mostly the result of Elon Musk's wild swings. The latest source of this volatility is the ongoing court battle between him and Twitter (NYSE:TWTR) after he backed out of his deal to buy the social media company for $44 billion.

    If Twitter secures a favorable verdict, Tesla's chief could be forced to complete the deal with some implications for Tesla shareholders. This summer, Musk offloaded $6.9 billion worth of Tesla stock to build a war chest ahead of a trial on the Twitter issue.

    Bottom Line

    Tesla stock, in my view, is a good name to have on your buying list in this bear market. The company is fast scaling up its production while remaining in a great position to benefit from a global shift to EV. Tesla has a long growth runway making its demand insulated from short-term economic headwinds.

    Disclosure: At the time of writing, the author doesn't own Tesla. The views expressed in this article are solely the opinion of the author and should not be taken as investment advice.

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