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The Ratings Game: Why Tesla’s ‘robust fundamentals’ can offset a challenged quarter

Tesla Inc. may be on track to report a “challenged quarter,” but there’s still plenty of reason to be optimistic about its stock, according to a Credit Suisse analyst.

While Credit Suisse’s Dan Levy expects that the company will post second-quarter deliveries of 242,000 vehicles, well below the consensus view for roughly 273,000, he said that the bullish case for Tesla
TSLA,
+4.60%

“is amplified” given the company’s strong positioning.

“We believe the long-term case for Tesla is clear – Tesla remains the global leader in EV [electric vehicles], and amid rising supply chain risks, we believe Tesla’s lead over other automakers in the race to EV is only amplified given its lead in vertical integration and its prior EV experience,” Levy wrote.

See also: Tesla stock selloff created ‘generational’ investment opportunity, analyst says

He cut his price target on Tesla’s stock to $1,000 from $1,125, a change he said is reflective of a higher discount rate. He also nearly halved his second-quarter earnings estimate, to $1.10 a share from $2.06 a share, after taking into account factors such as updated delivery expectations, the prospect of negative margin impacts from new Austin and Berlin facilities, and the likelihood of an impairment charge related to the company’s stake in bitcoin.
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Read: Tesla’s ‘strong competitive advantage’ earns stock an upgrade

Nonetheless, Levy was looking beyond the quarter and kept the outperform rating on the shares that he established back in January, as the lowered price target still implies near-40% upside from current levels. While the shutdown of Tesla’s Shanghai plant was “the story” in the second quarter, he expects a ramp in the second half of the year.

Additionally, the company has implemented price increases in the wake of surging inflation, though Levy sees these price hikes as a sign of Tesla’s strong demand and notes that they will begin to manifest in financial results later this year or early next year given that they only cover new orders.

“We…continue to believe in our thesis that robust fundamentals ahead should outweigh the near-term challenges for Tesla such as the recent growth selloff, production disruptions in China, lingering semiconductor shortage and magnified inflationary pressures,” Levy wrote.

Shares of Tesla surged 3.4% in Friday morning trading. They’re off about 28% over the past three months as the S&P 500
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+2.32%

has fallen roughly 15%.

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