"What Happened to Mighty Tesla?"... "Cut Your Exposure," Analysts Warn [Click eStock]

Adjusted EPS Beat Expectations, but
Operating Profit Plunged 56%
Robotaxi Earnings Contribution Expected in Second Half of 2027
"Insufficient Earnings to Justify Current Share Price"

Although Tesla reported earnings per share above market expectations, analysts say it will be difficult to justify its currently high share price as profits from key new businesses are taking longer to materialize.

On October 28, Se-hwan Kim, an analyst at KB Securities, maintained his "Underweight" rating on Tesla. "With the peak of the investment cycle pushed back to 2028, earnings remain insufficient to justify the currently high share price multiple, including valuation metrics such as the price-to-earnings ratio," Kim said.

Elon Musk, CEO of Tesla

EPS Holds Up, but Operating Profit Is Halved

Tesla's third-quarter revenue was $28.05 billion, down 0.2% from a year earlier and in line with market expectations. Adjusted earnings per share (EPS) came in at $0.48, beating estimates by 6.7%.

The problem was costs. Research and development spending on artificial intelligence (AI) computing infrastructure, chip development, and preparations for mass production of Optimus and the Semi rose 69.4% to $2.76 billion. As a result, operating profit fell 55.8% to $720 million, while the operating margin was just 2.6%.

"Gross profit increased, but operating profit fell sharply due to higher R&D and selling, general and administrative expenses," Kim said. "Depreciation of AI computing infrastructure, chip development, and costs to prepare for mass production of Optimus and the Semi drove up operating expenses."

New businesses are expanding in scale. Robotaxis are operating in six cities, and the energy business has a long-term backlog of unfulfilled orders worth $10.73 billion. However, robotaxis are not expected to make a meaningful contribution to earnings until the second half of next year. Optimus is also targeted for external sales by the end of next year, and it will take at least another year to establish production capacity of 20,000 units per week.

Tesla CEO Elon Musk said robotaxis would begin to have a noticeable impact on earnings starting in the second quarter of next year and would account for a significant share in the third and fourth quarters. He forecast that it would take at least another year for Optimus to reach production of 20,000 units per week.

Investing Before Making Money...More Spending Through 2028

Tesla lowered its capital expenditure (Capex) target for this year to $20 billion, but analysts said the spending had been pushed back rather than reduced. Cumulative capital expenditure through the third quarter had already reached $13.01 billion, more than double the amount in the same period last year.

"The reduction in the capital expenditure forecast is a deferral, not a cut," Kim said. "With robotaxis expected to contribute to earnings in the second half of next year and external sales of Optimus targeted for the end of next year, we believe operating leverage will not normalize until after 2028."

Tesla has secured borrowing capacity of up to $30 billion and plans to resume increasing investment from next year in its robotaxi fleet, Optimus, AI computing infrastructure, and semiconductor fabs. CEO Musk also forecast that capital expenditure would increase from next year and reach tens of billions of dollars in 2028.

Valuation concerns also remain. Tesla's 12-month forward price-to-earnings ratio (PER) is 197.2 times, more than 10 times the S&P500 average of 18.7 times. By contrast, its return on equity (ROE) is 6.5%, well below the market average of 24.6%.

Tesla's price/earnings-to-growth (PEG) ratio, based on an average annual EPS growth rate of 20.5% over the next three years, is also 9.6 times, higher than the market average of 0.8 times. Tesla's expected earnings growth rate is also lower than the S&P500 average of 22.5%.

"The figures no longer support the argument that high growth justifies a high multiple," Kim said. "The current share price reflects in advance the earnings that robotaxis and Optimus are expected to generate from next year onward, rather than earnings from the automotive business." He added, "We maintain our Underweight rating to manage volatility."

This content was produced with the assistance of AI translation services.