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Tesla (TSLA): Investors and Traders Gear Up For Another Earnings

Daniel Laboe

The car company that is driving the electric vehicle (EV) revolution is preparing to report its earnings after the bell Wednesday, October 23rd. Tesla TSLA has traded all over the board with anything from positive headlines to disappointing earning hurling this stock one way or the other. The recent positive market sentiment and lowered expectations lead me to fancy this stock as a buy before earnings.

Q3 estimates have dropped significantly since the last earnings report. Zacks Consensus estimates illustrate an EPS of -$1.40 on sales of $6.6 billion. This would represent a drop from profitability and a year-over-year sales decline of 4.5%.

TLSA estimates have historically been exceptionally wrong. Q3 of last year, this company beat EPS estimates by 200%, revealing a strong profit when analysts were expecting a substantial loss. Revenues also beat estimates by north of 20%.

TSLA is a big mover on earnings with an average price movement of 8.2% over the past 10 quarterly reports. This is due to the ostensibly unpredictable quarterly results and investor relations team that either doesn’t know what to expect or wants investors to be surprised. My guess is the latter.

I think the company wants to keep analysts and investors in the dark before earnings and big headlines because this keeps the stock relevant. The unpredictability of TSLA makes it a trader’s bane, and at the same time, they can’t stay away, keeping liquidity high.

Most Recent Rally

The most recent rally, which began this summer, was initially a bounce back from the liquidity concerns, which were alleviated with a capital infusion along with a record number of vehicle deliveries in Q2 (95,200 cars). Tesla was able to raise almost $3 billion in an equity and bond offering in early May.

TSLA had fallen to the lowest levels the stock had seen in over 3 years, and the reversal was sharp, as short-sellers exited positions and savvy investors saw this as an undervalued equity. Following the robust vehicle delivery figures in June, the share price surged further. The stock rallied almost 50% in a month and a half after its low into earnings. TSLA missed big on its Q2 earnings, which led to another stock break down.

This breakdown only lasted a month, and we are now back up to the $250 level, which this stock has historically bounced off. The $250 level is represented below in a 3-year chart by the red line. Investors can’t stay away from TSLA when they see a price they like. This stock is also prone to trend trading (until it’s not), meaning that it has big run-ups and run-downs.

TSLA’s October rally is due to its record-breaking delivery figures. The EV firm delivered an astounding 97,000 cars in the 3rd quarter. Elon’s over-ambitious delivery forecast of 360,000 to 400,000 vehicle deliveries may still be attainable if the company can deliver 105,000 in the 4th quarter.  

This boost in investor sentiment could be a good trend trade into earnings, which is expected after the bell tomorrow.

Shanghai Gigafactory

Tesla’s Gigafactory 3 in Shanghai, China, is going to change the game for the electric vehicle maker. US automakers are going to be subject to a 50% import tax. Tesla’s new domestic Gigafactory will shield it from this tax and give the company direct access to the largest electric vehicle market in the world.

The new factory is expected to start production this quarter and looks to be on schedule, something that is rare for Tesla. The company is anticipating to make 250,000 cars per year in Phase 1 and eventually reach its capacity of 500,000 vehicles produced annually.

If the project can be completed with no hiccups, this will solidify the firm as a global EV leader. China buys more than double the number of electric cars of any other single country, and Tesla’s direct access to this market should proliferate its sales.

Take Away

TSLA has momentum behind it before going into its Q3 earnings report. The positive headlines that we have seen over the past quarter lead me to believe that this could be a positive earnings. Estimates have dropped substantially since its disappointing Q2 earnings and expectations are low. This could provide a springboard for this stock to be thrust back into the $300s if this report can display positive results.

Look for any changes in management guidance on China operations as well as domestic. Bear in mind that guidance has historically been erroneous, though it still shifts market sentiment. With negative earnings expected, a significant beat on either metric could yield TSLA investors and traders some substantial gains, and vice versa.

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