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London (CNN Business)Tesla (TSLA) just posted record quarterly profits, with one measure of earnings passing the $1 billion mark for the first time.
But in order to justify its sky-high stock price, the automaker will need to overcome a growing list of challenges.
What’s happening: A global chip shortage is snarling production, while the business environment in China, a crucial market, remains fraught. Competitors are gaining ground and Tesla faces a safety investigation tied to a fatal crash in Texas.
Shares are down 2% in premarket trading.
Some Wall Street analysts still see a solid case for Tesla’s stock, which is trading at more than 1,100 times its earnings, according to data from Refinitiv.
“While the company is still far from the sort of scale to justify its stock price … production has exploded, and the company expects further expansion with the 2021 completion of its Berlin and Texas factories,” Bespoke Investment Group told clients.
But a closer look at the company’s financial results show that a big reason the company had a strong start to the year is because of its sale of regulatory credits, which brought in $518 million in revenue, and bitcoin holdings.
Tesla invested $1.5 billion in bitcoin last quarter while the cryptocurrency was soaring. Zachary Kirkhorn, the automaker’s “master of coin” (okay, chief financial officer), said the company later sold 10% of its position, resulting in a $101 million profit. That’s nearly a quarter of the $438 million Tesla earned when results are adjusted for stricter accounting standards.
And while there’s no denying that the company’s car sales could continue to boom this year, there are, as ever, a long list of risks.
CEO Elon Musk, whose official title is now “Technoking,” told investors Monday that the chip shortage was “a huge problem” for Tesla, and that it was battling “some of the most difficult supply chain challenges that we’ve ever experienced.”
Musk said the company should be able to stick to its target for better than 50% growth in sales this year, which would take sales over the 750,000 mark.
To reach that target, the company needs to continue to see strong demand in China, the world’s biggest market. But it faces potential issues there from both consumers and Beijing.
Last week, Tesla’s booth at the Shanghai Auto Show was briefly besieged by protesters complaining about problems with its cars. The episode comes after Tesla was summoned by regulators in February to discuss the quality of its Shanghai-made vehicles. The following month, reports surfaced that the country’s military had banned its vehicles from entering its complexes over concerns that cameras onboard could be used for spying.
Chinese authorities aren’t the only ones putting Tesla under the microscope. The company is also working with US safety investigators after two passengers were killed in a crash of a Tesla Model S outside Houston.
These challenges come as Tesla faces increasingly fierce competition from upstart rivals like Rivian, as well as traditional automakers like Volkswagen and General Motors that are ramping up their electric vehicle offerings.
Tesla could still rise above the fray — and Bespoke Investment Group notes that the company’s stock is often divorced from its financial performance anyways. But the path ahead for Tesla and its Technoking looks tricky.
Wall Street’s Archegos losses just topped $10 billion
Losses caused by the collapse of US hedge fund Archegos are piling up, my CNN Business colleague Charles Riley reports.
The latest: Swiss bank UBS (UBS) revealed on Tuesday that it lost $774 million from last month’s implosion of Archegos Capital Management, a bigger hit than many analysts expected. The announcement came as Japan’s Nomura (NMR) said it would book losses of $2.9 billion from Archegos, a sharp increase from its initial estimate of $2 billion.
Global banks have now disclosed losses of at least $10.4 billion from the failure of Archegos, a New York-based family office that managed the fortune of investor Bill Hwang. Some smaller banks may also have been hit, and the fallout has taken the shine off an otherwise strong earnings season for global banks.
Credit Suisse (CS) has been rocked hardest. The Swiss bank said last week that the collapse will cost it a total of $5.5 billion, and it has announced the departure of its top investment banker and chief risk officer. Other members of the executive board will not receive bonuses for 2020.
Morgan Stanley (MS) suffered a $911 million loss, and Japanese lender Mitsubishi UFJ Securities is expecting to lose roughly $300 million.
Remember: Archegos used borrowed money to build massive positions in stocks including media companies ViacomCBS (VIACA) and Discovery, and was unable to pay back its lenders when share prices dropped. The resulting damage to banks has raised concerns about the dangers of leverage and led to calls for tighter regulation.
Is the $2 trillion company club about to expand?
Apple (AAPL) is the only American firm to reach a $2 trillion market value. But it could soon have a lot more company in that elite club, my CNN Business colleague Paul R. La Monica reports.
Microsoft is worth just under $2 trillion. Amazon has a market capitalization of $1.7 trillion, and Google owner Alphabet is worth about $1.5 trillion.
Tech stocks have come roaring back in recent weeks, helping to push these Nasdaq stalwarts near record highs.
In fact, tech’s Magnificent Seven — Facebook, Amazon, Apple, Netflix, Alphabet, Microsoft and Tesla— are now collectively worth about $9.3 trillion. That’s a quarter of the S&P 500’s total market value of $37.5 trillion.
“The earnings expectations for the S&P 500 are through the roof for this year as investors expect this great recovery, and tech is a big part of that,” said Daniel Morgan, senior portfolio manager with Synovus Trust Company. “These companies are just so dominant.”
Morgan noted that while some of the tech leaders of the 1990s, such as IBM, Oracle and Cisco, eventually began to post slower earnings and sales growth, that doesn’t appear to be happening with the current industry leaders.
“They are high-growth companies but also defensive because they could still do well if the reopening of the economy doesn’t go smoothly after Covid,” said Chris Gaffney, president of world markets at TIAA Bank. “Some consumer behavior changes during the pandemic may be permanent.”
3M (MMM), Eli Lilly (LLY), Invesco, GE (GE), Hasbro (HAS), JetBlue (JBLU), Raytheon (RTN) and UPS (UPS) report results before US markets open. Google owner Alphabet (GOOGL), Capital One (COF), FireEye (FEYE), Microsoft (MSFT), Mondelez (MDLZ), Pinterest (PINS), Starbucks (SBUX) and Visa (V) follow after the close.
Also today: US consumer confidence data for April posts at 10 a.m. ET.
Coming tomorrow: Investors will comb through the Federal Reserve’s latest policy announcement for any signs of concern about inflation.
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