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Tesla's (TSLA) Inflection Point: Earnings After The Bell Wednesday 7/23

Daniel Laboe

Earnings season is hitting the height of its excitement this week with the remaining FANG stocks FBAMZNGOOGL reporting as well as one of my personal favorite quarterly reports, Tesla TSLA. TSLA is a big mover on earnings reports with an average move of 7.8%. Unfortunately, 6 of the last 10 earnings had a negative impact. Expectations have significantly dropped since Tesla’s Q1 report was released and I believe that analysts’ Q2 estimates are conservative.

Tesla is releasing its earnings after the bell on July 23rd, and analysts are anticipating strong sales growth combined with an improved bottom-line loss. Q2 EPS estimates current sit at a $0.54 loss per share and estimated sales are $6.38 billion, which would represent a significant loss improvement and 59% revenue growth year-over-year.

Tesla and its ostentatious CEO Elon Musk like to keep its investors on their toes, with estimates being historically misguided, frustrating both sell-side analysts and investors. This is the primary reason that earnings have caused big moved to TSLA’s price in past earnings reports.

Recent Performance

The first 5 months of 2019, TSLA lost over 46% of its value due to liquidity concerns. Investors didn’t know if Tesla was going to be able to make it through 2019 at its cash burn rate.

In May, Tesla was able to successfully raise more than $2 billion in a combined convertible bond and seasoned equity offering (SEO), in which Elon Musk himself bought $25 million worth of shares. This surge in funding eased investors’ liquidity concerns and gave the stock a good boost starting in June (almost a month after the offering). TSLA is up 45% since the beginning of June.

TSLA is one of the most volatile stocks on the market. It is currently trading at $259.87, having been as high as $387 and as low as $177 over the past 52 weeks.

Above you can see TSLA’s 4-year chart where the red line represents the $250 price level that has worked as both a support and a resistance level. We are currently riding this inflection point, and the earnings release after close on Wednesday is going to dictate whether TSLA bounces off or surges through this price level.

Consumer Shift to Cheaper Tesla

The WSJ looked at California’s new Tesla registrations for Q2. California is the largest market for electric vehicles (EV), making up almost half of the US’s total EV sales. The data showed that the Golden State natives were purchasing far less high-end Tesla like the Model S and Model X with registrations down 54% and 40% respectively. On the other hand, Model 3 registrations were up almost 100% in Q2.

This is an illustration of how Tesla’s topline is expected to be driven moving forward, higher volume but lower-margin sales. What to look for in this upcoming earnings report is whether the additional Model 3’s sold can make up the decline in both the Model S and X.

Take Away

Tesla’s immediate future is quite uncertain, but I believe that this firm has strong long term potential. Gigafactory 3, being built outside of Shanghai, is ahead of schedule and Musk is anticipating a lofty production target of 3,000 vehicles per week by the end of this year. China is the world’s largest EV market by far, being driven by government incentives. Competition is steep, but I believe that once Tesla’s are domestically made in China, demand will surge. I discuss this in more detail in my article, Tesla Is Charged And Ready To Drive Returns.

Tesla’s exciting earnings release is something to pay attention to even if you do not own the stock. Look for margin changes as the firm transitions to a higher volume, lower margin business model, with scale being the driving forces moving forward.

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 can still shift market sentiment. With negative earnings expected, a significant topline beat could give TSLA investors some short-term gains.

 

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