Tesla will deliver despite supply chain challenges: Analyst

Colin Rusch, Oppenheimer Analyst, discusses Tesla's record Q3 earnings report despite the ongoing supply chain crunch.

Video transcript

AKIKO FUJITA: Let's begin, though, with those earnings we got out from Tesla. Record revenue pushing Tesla shares higher today. We are seeing a big pop. The company posted $1.6 billion in profit in the quarter on revenue of $13.8 billion, but it did warn of supply shortages and congestion at the ports potentially slowing production at its factories.

Let's bring in Colin Rusch. He's Oppenheimer analyst. Colin, I just said potentially slowing production at the factories, but we heard the CFO already flagged that, saying, you know, the supply shortages, logistics issues, have made it really hard to run factories at full capacity. Have we seen the full extent of the impact on this on Tesla?

COLIN RUSCH: I don't think so, and they talked about that in detail last night that they're working through all the different elements of raw materials, different components to keep things moving along. And that's not unique to Tesla. That's across the board. What I think is unique to Tesla is that despite their growth, they are continuing to execute awfully well and a bit ahead of expectations, notably on the margin side and where they beat gross margins and operating margins by a solid 300 basis points.

And I think that, for us, is the key to their continued efficiency and profitability. And we think they have some price leverage with consumers that they're just starting on right now. And as those higher cost items start flowing through their bill of materials, we think they're going to be able to pass on most of that cost to consumers.

ZACK GUZMAN: Yeah, the margins here, it seems to be-- I mean, with the stock up 3% today, it seems like analysts-- you know, there's always a bull, bear kind of thing around Tesla. But today, it looks like the bulls are in charge. And I think a lot of people are focusing in on those margins and the way they moved up. As we highlighted here, operating margin of 14.6%, Q3, 11% in Q2, 9.2 before that. So I mean, when you look at that, what is the expectation for margins to continue to improve, I guess, in the future?

COLIN RUSCH: You know, they talked about looking at industry high margins. And Ferrari's the benchmark there. So that's getting well into the 30s with approaching 20% operating margins. And that sort of-- those sorts of numbers are, you know, I think really compelling for investors over time that they have a technology lead and they're maintaining it. And so, as we see them kind of creep up higher with that margin profile, as they scale up volumes, you know, I think we're going to start to see some appreciation.

But I'll say at this point, you know, valuation is pretty substantial for the company. And it's really predicated in our view around their ability to deliver on the autonomous program. And so, we think the EV program, where they've done a tremendous job and are continuing to make improvements is going well and is a precursor to potential success with that autonomy program. But I think that's really what's going to be driving the stock higher from here, which is, you know, the information that we got yesterday was really about the level of detail that they're getting on driver behavior in their insurance program.

And within that, they're looking at a lot of nuance in terms of how drivers behave on the road and aligning their premiums with that behavior. And that sort of awareness and data, I think, is really important in terms of how they take that into how these vehicles navigate the road, as well on their own without a driver. And that's the heart of this for us, is really that leverage on the intelligence in the data and to the full operating system.

AKIKO FUJITA: Colin, I want to get back to what you said about potential disruption stemming from what we have seen with supply shortages. I mean, Tesla's deliveries are up about, what, 73%, more than 70%, from the previous year. So they're well past the goals they've set for this year. To what extent does that number pull back as a result of things that are largely out of Tesla's control right now?

COLIN RUSCH: You know, so they're managing what they can manage as effectively as they can. And they've targeted 50% annual growth for a number of years. And I think that sometimes you get a little ahead of that, sometimes you're a little behind that as you ramp up factors. But the fact that they're talking about first cars coming out of both Austin and Berlin by the end of the year is a good indicator that at least what they're controlling is going well and progressing on schedule. And now we'll see about components.

You know, so I think they'll get a pass on any sort of slowness. We saw that with Aptiv with their pre-announcement that the stock really behaved pretty well, despite the supply chain challenges that I think are pretty well understood. And our view is that investors are looking at what happens once the supply chain gets rebalanced and who's really going to be a net winner. And Tesla clearly is one of the net winners in the evolution of the transportation market.

ZACK GUZMAN: Yeah, and you got a price target north of $1,000 a share, $1,080, actually, as I look at it here. And I got to ask you a personal question, and I'm sure a lot of analysts are kind of dealing with it now. But of course, Bitcoin and crypto there at Tesla another thing to factor in. And it took a $51 million impairment charge in Q3.

Obviously, I think now with prices where they're at, for Q4, things looking a little bit better here. I mean, how hard is that maybe to factor in as a swing factor when you're trying to figure out fair value for Tesla? And maybe is it not that big of an issue as you get to your $1,080 price target?

COLIN RUSCH: Yeah, we don't take it into consideration at all. You know, there is currency with all of our companies. And so how they manage their currency hedge tends to be more on the rounding error. It tends not to be such a high profile thing as you get with Bitcoin, which is a new currency. And so, you know, we'll see how those hedges play out in the fourth quarter with the adjustment, but that's not something that factors into the price target.

And it's just one of the elements of risk management that we take into consideration around cash and, you know, all of the different supply chain and the balance sheet. So it's not a huge deal for us. And we think they're continuing to be pretty judicious around it as they wade into that currency a little bit more aggressively than some of their peers.

AKIKO FUJITA: Oppenheimer analyst Colin Rusch, good to talk to you today. Appreciate the time.