Shares of Tesla (TSLA -3.25%) were up sharply on Tuesday, fueled by a combination of factors. An upbeat day for the overall stock market, an upgraded rating on the company's financial position from Moody's credit rating agency, and a positve note from an analyst were some of the key reasons for the stock's strong performance.
As investors digest the growth stock's big move higher this week, here's a close look at what's driving the optimism for the electric carmaker from both the analyst and Moody's.
The path to $220
Morgan Stanley analyst Adam Jonas released a note to investors on Tuesday praising Tesla's recent price cuts for its vehicles. This is "rational" business behavior, he contended. The company's leadership and economies of scale in the electric vehicle market simply put Tesla in a spot in which it can bring prices down and be more competitive in the auto market.
This contrasts with some sentiment earlier this year, in which price cuts were often interpreted by the media and some analysts as a negative factor. These more bearish views of price cuts argued that they were a sign of weak demand.
However, worries about Tesla's demand seemed to largely fade away after the company's fourth-quarter earnings call.
"The most common question we've been getting from investors is about demand," said Tesla CEO Elon Musk during the call. "... I want to put that concern to rest." He went on to note that orders during January were coming in at "almost twice the rate of production." In absolute terms, the company saw the highest orders, year to date, that it had ever seen, Musk explained.
This was likely due in large part to price cuts the company had rolled out leading up to the earnings call. To this end, Musk acknowledged that it's difficult to know whether orders would continue at that rate. Nevertheless, the CEO was confident in the demand outlook for Tesla's vehicles.
Jonas believes that more price cuts are likely to come over time. Tesla's cost competitiveness has Jonas reiterating his $220 12-month price target for the stock.
Moody's is confident in Tesla's profitability
Adding to the bullishness for the stock this week, Moody's upgraded its rating on the company to Baa3. In addition, it provided rosy commentary on the company, predicting that "Tesla will remain one of the foremost manufacturers of battery electric vehicles, with an expanding global presence and very high profitability."
While not related to Jonas' buy rating on the stock, Moody's confidence in the company's profitability certainly adds to the company's credibility. The higher rating also gives Tesla access to more favorable debt terms if it were to raise debt in the future.
Echoing Moody's comments on Tesla's profitability, the company generated net income of about $12.6 billion in 2022. This was up from $5.5 billion in 2021. This strong profitability has led management to believe that Tesla won't need external funding to grow its business. "We have sufficient liquidity to fund our product roadmap, long-term capacity expansion plans, and other expenses," Tesla said in its fourth-quarter letter to shareholders.
Given Tesla's surging profitability and its ability to cut the prices of its vehicles to drive demand, it's not surprising that shares have risen sharply this year. There's a lot to like about Tesla's business and its long-term prospects.