October 25, 2018 / 1:15 PM / 23 days ago

Tesla third-quarter profit quiets critics, shares surge

(Reuters) - Tesla Inc shares jumped on Thursday as Wall Street analysts said the company had turned a corner with profitable third quarter results and might not now need to raise outside capital.

A 2018 Tesla Model 3 electric vehicle is shown in this photo illustration taken in Solana Beach, California, U.S., June 1, 2018. Picture taken June 1, 2018. REUTERS/Mike Blake

Rising 12 percent at one point in early trading, the move in shares added as much as $6 billion to Tesla’s market value, capping a tumultuous few months for the company and its billionaire chief executive, Elon Musk.

Tesla shares hit a record in August but sank back as Musk was sued by short-sellers and U.S. regulators for tweeting, and then swiftly abandoning, a plan to take the company private.

Wall Street analysts have been saying for months that the company would need to raise more money to sustain a ramp up of production of the crucial Model 3 sedan, but several said on Thursday that might no longer be necessary.

“Simply put, deliveries and earnings are the only battles that matter,” said Gene Munster, an analyst with well-known tech venture capital firm Loup Ventures.

“It will go on for years, but every time Musk and Tesla beat expectations, they win another battle in that war. Profitability is improving at a rate where the company is on track to generate enough cash to meet its $1.7 billion debt obligations.”

Tesla reported free cash flow of $881 million in the quarter - the first time since the third quarter of fiscal 2016 - and Musk said the company will maintain that in the coming quarters.

Musk has been saying since May that Tesla does not plan to raise equity or debt.

“Assuming R&D spending is not delayed and Tesla is not forced to introduce a lower price (Model 3) prematurely to maintain volume, Tesla could be self-funded,” Jefferies analysts wrote in a client note.

“The Tesla investment case is about growth, not free cash generation, so we expect cash to be invested in growth and support current leverage if Tesla demonstrates sustainably positive free cash flow,” they said.

The yield on Tesla’s $1.8 billion high-yield bond due in August 2025 < 88160RAE1=> dropped to a two-month low as the debt rallied off the quarterly results. Since Monday, the yield on the bond, which sports a 5.3 percent coupon, has dropped more than 90 basis points to 7.49 percent from 8.40 percent.

Tesla reported profit of $311.5 million, or $1.75 per share, for the third quarter ended Sept. 30, compared with a loss of $619.4 million, or $3.70 per share, a year earlier.

Musk’s penchant for courting controversy with his erratic tweets had put intense pressure on Tesla to convince Wall Street that the company could produce Model 3 cars in a cost-efficient manner and turn a profit.

Some analysts, however, believe Musk may be driving profits by selling only high-end, high-margin Model 3s and those profits may not be sustainable.

“We believe Tesla is exhausting its high-end backlog to fuel near-term profitability and we have concerns around demand in 1H19,” UBS analyst Rajvindra Gill wrote.

Other analysts believe that Tesla has indeed turned a corner and is on a growth path.

“We believe the TSLA narrative is starting to change as the company transitions to becoming sustainably profitable,” Baird Research analyst Ben Kallo said.

That was the same sentiment showed by Tesla’s long-time critic and short-seller Citron Research, when it said earlier this week that it had a change of heart and is now betting the electric automaker’s stock will rise.

At least three brokerages raised their price targets on the stock. Of the 29 brokerages covering the stock, 10 have a “buy” or higher rating, nine on hold and 10 have a “sell” or lower.

The median price target was $316. Shares were last trading up 7.2 percent at $309.80.

Reporting by Supantha Mukherjee and Jasmine I S in Bengaluru; Editing by Saumyadeb Chakrabarty and Patrick Graham

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