Tesla Posts Record Earnings at Start of Turbulent Year

Tesla Inc. posted a record quarterly profit despite supply disruptions, fueled by rising deliveries and increasingly broad-based demand for electric vehicles.

The Silicon Valley car maker has enjoyed booming sales, driven by both its popular Model Y compact sport-utility vehicle and sustained demand in China. The company also has benefited from the wider embrace of plug-in cars as governments across the world push to phase out gasoline-powered vehicles, in some cases through subsidies.

“We’ve seen a real shift in customer perception of electric vehicles, and our demand is the best we’ve ever seen,” Chief Executive Elon Musk said Monday on an investor call.

Tesla on Monday said revenue in the first quarter jumped around 74% from the same period a year earlier to US$10.4 billion. The company generated a US$438 million net profit, up from $16 million a year ago. Wall Street on average expected the company to report sales of about $10.5 billion and net income of around $509 million for the January through March period, according to analysts surveyed by FactSet.

Tesla said it delivered 184,877 vehicles in the first three months of the year, more than double the number during the same period a year earlier. The company, which delivered nearly half a million vehicles in 2020, reaffirmed it expects that figure to rise more than 50% this year.

The company’s strong financial start to the year comes as it faces challenges on other fronts. Federal auto-safety officials are investigating the fatal fiery crash of a Model S sedan earlier this month in Texas. Neither of the victims was found in the driver’s seat, local officials have said. The National Highway Traffic Safety Administration’s probe of the wreck is one of more than two dozen investigations of crashes involving Tesla vehicles.

The crash left questions about whether or how the vehicle could have been operating without anyone in the driver’s seat.

A Tesla executive said the company was working with local and federal authorities to investigate what happened.

The car’s steering wheel, he said on the call, was found to be deformed, “leading to the likelihood that someone was in the driver’s seat at the time of the crash.” All the seat belts, post crash, were found to be unbuckled, he said. Tesla wasn’t able to recover data from the car’s memory device.

Tesla conducted a study along with authorities in which the company tried to replicate the likely crash scenario, the executive said. The company said that a driver assistance feature that helps with steering didn’t engage in the test, while another feature, adaptive cruise control, only activated when a driver was buckled in and traveling at above 5 miles per hour.

Mark Herman, the constable whose precinct the crash happened in, declined to comment on Tesla’s statement that someone likely was in the driver’s seat at the time of the crash, saying that the incident remained under investigation.

Tesla has also faced parts shortages that led the company to briefly shut down its Fremont, Calif., factory in February. Rivals such as General Motors Co., Ford Motor Co. and Volkswagen AG have had to idle some production capacity because of a global semiconductor shortage.

“We were able to navigate through global chip-supply shortage issues in part by pivoting extremely quickly to new microcontrollers,” the company said in a note to shareholders, adding that it also was devising new software for chips made by new suppliers.

Mr. Musk said the past quarter “had some of the most difficult supply chain challenges that we’ve ever experienced.” Those go beyond computer chips, he said. China production was held back because key engineers couldn’t travel there because of Covid-19 related quarantine restrictions, he said. Some of the effects are likely to last in the current and following quarter, he said.

Tesla said it had successfully lowered the cost of making cars, helping offset a decline in the average price of its vehicles.

The company’s bottom line also benefited from several factors not directly linked to car sales. Its financial results have been aided by the sale of regulatory credits to rival auto makers that need them to comply with emissions-related rules. Such credits brought in $518 million in the most recent quarter, up from $354 million during the year-earlier period. Tesla has previously said it doesn’t expect such sales to be a material part of its business.

The company also said it saw a positive earnings effect from the sale of bitcoin in the period. Tesla bought $1.5 billion worth of the cryptocurrency in the first quarter and sold 10% of that, Chief Financial Officer Zach Kirkhorn said. The company is now accepting bitcoin as payment for products sold in the U.S.

Mr. Kirkhorn said the company opted to invest in bitcoin when it was looking for a place to store cash it didn’t immediately need as a way to preserve liquidity while also earning a return. “It is our intent to hold what we have long-term and continue to accumulate bitcoin from transactions from our customers as they purchase vehicles,” he said on the investor call.

Tesla’s success in popularizing electric vehicles transformed the company into the world’s most valuable car maker. Its success also spurred legacy car makers and startups alike to develop competing models, some of which are showing early signs of eroding Tesla’s market share.

In the U.S., for example, Tesla vehicles accounted for roughly 70% of the all-electric vehicles sold in the first quarter, according to the research firm Cox Automotive Inc. That is down from about 82% during the same period a year earlier.

Tesla’s stock soared more than eightfold last year. It is up roughly 4.5% in 2021 after advancing 1.2% on Monday ahead of results. The stock retreated more than 2% in after-hours trading.

Global demand for electric vehicles continues to increase, though, and Tesla is adding production capacity to keep pace. The company said it remains on track to begin producing vehicles this year at its new car plants near Austin, Texas, and outside Berlin, its first in Europe. Tesla has expanded capacity at its first overseas plant in Shanghai and began delivering China-made Model Y vehicles this year after kicking off with the Model 3 sedan in 2019.

China has been a growth engine for Tesla, helping to lift the company to its first full-year profit last year. But the company has hit a rough patch in the market recently. Chinese authorities summoned Tesla in February over consumer quality complaints. The government also restricted the use of Tesla vehicles by military personnel as well as employees at key state-owned companies over data-security concerns.

Earlier this month, a single protester with a disputed claim about the safety of Tesla’s vehicles drew widespread attention across the Chinese internet, which is closely controlled by the government.

Tesla has apologized for its treatment of some customers in China and said it would do better. Mr. Musk said last month that Tesla would be shut down if it used its vehicles to spy, which he said was “a very strong incentive for us to be very confidential.”

Tesla also reaffirmed that it expects to deliver its first semitrailer trucks to customers in 2021, two years after initially planned. Mr. Musk said in January that the company didn’t have enough battery cells to go into production with the vehicle.

Wall Street’s hottest trade has gone ice cold.

For years, it paid off to buy stocks that were rising in price—and bet against struggling shares. The momentum trade was especially profitable this year, as investors piled into hot stocks including Micron Technology, Nvidia, Advanced Micro Devices and other artificial-intelligence darlings while wagering against those likely to be hurt by the embrace of AI.

The S&P 500 Momentum Index soared 44% in the second quarter, its best quarterly performance on record, and it surged 133% over the past five years, nearly double the broad market’s performance.

Mega funds and rookie investors alike piled into the trade, some using leverage and options contracts in an effort to amplify their returns, propelling the underlying shares higher.

“It is a self-fulfilling prophecy,” said Matthew Tym, managing director at Cantor Fitzgerald, of the trade.

Suddenly, the trade is a loser. The momentum index has tumbled more than 9% since July 1, lagging behind the S&P 500’s 2.8% gain. The index—which tracks stocks in the S&P 500 based on a “momentum score”—is on track for the biggest quarterly underperformance in 25 years. July was the second-worst month for the momentum trade in around 40 years, according to Bank of America estimates; the only month worse was April 2009, in the teeth of the global financial crisis.

Hedge funds that bought momentum shares while shorting low-momentum stocks suffered even more. At the same time, a basket of the most popular stocks held by hedge funds tracked by Goldman Sachs recorded its biggest one-month underperformance in July relative to the S&P 500 in more than 20 years, according to the bank’s analysts.

Momentum trading is based on a rather simple observation: Investments that go up tend to keep outperforming; those that underperform often remain laggards. This kind of trading might seem too simple a stock-picking strategy to work. Yet it often has.

“For decades, it didn’t take a lot of sophistication to run a momentum strategy and make a decent living at it,” says Agustin Lebron, senior researcher at EquiLibre, a trading firm.

Part of the reason: It takes a while for corporate and other information to spread to various investors, so they slowly build positions, producing buying momentum.

“A huge pension fund can’t flip around its positions in a day,” says Lebron. “Behavioral biases also account for some of the effect, as well—people tend to sell their winners too early and hold losers too long.”

Fans of the strategy point to the human tendency to extrapolate from past results—and chase investment returns—noting that momentum patterns have been evident in markets for decades, even centuries. They also say that some of the worst months for momentum strategies are during longer periods of outperformance.

Some have been doing the trade by buying the strongest investments in a sector while shorting the weakest; others lean in to rising markets or asset classes. Still others use a quantitative approach or turn to banks or others who sell ways to make distinct wagers on momentum as a “tradable factor” or a “thematic basket.”

The fans remain believers. “Any strategy has disappointing periods,” says Antti Ilmanen, global co-head of the portfolio solutions group at AQR Capital Management.

The surge in Moderna and other biotech stocks helped crush the momentum trade. These shares were among the most heavily shorted in recent years, but positive news on a cancer vaccine from Moderna and Merck sent those stocks flying, crushing some quant and other hedge funds. Moderna is up around 150% so far this month.

These traders had an especially rough day on Aug. 19, which Goldman Sachs told its clients was the worst day for “systematic long-short managers” in more than two years. About half of the losses were because of momentum trades, the bank said.

Some traders have begun to short, or bet against, the very stocks that propelled the momentum trade earlier this year. Net short positions in futures tied to the Nasdaq-100 index among speculators recently climbed to some of the highest levels of the past two decades, according to data from the Commodity Futures Trading Commission.

The about-face is a sign of how markets have become more treacherous for investors, even as indexes keep climbing. Part of the issue: the recent meltdown of Situational Awareness, a hedge fund that had piled into some of the most popular momentum shares, including chip stocks. After a period of market tumult, Nvidia shares rocketed almost 9% after its earnings, showing how quickly sentiment can shift.

Some investors say the run-up in share prices driving tech stocks higher reminds them at times of the dot-com frenzy decades ago.

Mike Ogborne, the founder of San Francisco-based Ogborne Capital Management, said he has grown more cautious on technology stocks and is keeping more of his portfolio in cash than he typically does.

And he is nervous about the surge in spending by technology giants and quarterly capital expenditures that keep rising.

“It is a little bit like Cinderella and the clock striking midnight. You don’t know when midnight is going to come around,” Ogborne said. “They don’t send a memo around telling you when the capex cycle is over.”

Tesla Posts Record Earnings at Start of Turbulent Year

Electric-vehicle pioneer faces safety investigations and mounting competition.

Wall Street’s hottest momentum trade has reversed sharply, as former winners tumble and heavily shorted stocks surge.