Tesla: 'Expectations were too high' on third-quarter earnings, analyst says

ROTH Capital Partners Senior Research Analyst Craig Irwin joins Yahoo Finance Live to discuss Tesla earnings and its revenue miss.

Video Transcript

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- All right, an earnings alert now. You can see Tesla shares down just over 3% after hours. Earnings are out. Yahoo Finance's Senior Autos Reporter Pras Subramanian has the numbers for us. Hey man, what are you seeing?

PRAS SUBRAMANIAN: Hey man. So yeah, stock down a bit here. There was a miss on revenue, Q3 revenue, $21.45 billion, that's a miss. People wanted to see 22.13 or thereabouts.

Adjusted EPS beat, though, 105 versus 101 estimate. And then also the gap net income was $3.3 billion. That topped estimates of $3.2 billion, but it's that topline revenue figure that's kind of weighing on the stock.

They also maintain their production outlook for the year of 50% compound annual growth rate. So about that would be about 1.4 million vehicles in 2022. That means they're going to make around 500,000 vehicles in Q4. So that's kind of a stretch.

We'll see if they can do that. But that's what they're saying that they'll do. Want to hear more about the demand story here. Tesla talking about how they're trying to basically increase production as much as they can. In the letter, they talk about how we remain focused on increasing vehicle production as quickly as possible, increasing our weekly build rate in Fremont and Shanghai, and progressing steadily through the production ramps in Berlin and Texas.

They also added in the shareholder letter that they see Berlin and both Texas with an install capacity of around 250,000 vehicles or less. So we're seeing that's new. So I'm hoping to hear more tonight. Elon Musk will be on the call. Want to hear more about Cybertruck production, and also, Tesla Semi, which they see still kind of seeing deliveries happening in December 2022.

- Yeah, certainly, that stuck out to me, Pras, the initial phase of semi deliveries on track to happen in just about two months. Again, on track for that 50% and average annual growth in deliveries. Dave, a couple of other things that stuck out to me in this report, logistics volatility supply chain bottlenecks remaining immediate challenges here for Tesla. And also they're saying that they continue to believe that battery supply chain constraints will be the main limiting factor to EV market growth in the medium and longer term. So yes, things are improving, but still, a number of headwinds do remain.

- Yeah, we've heard a lot about that in terms of the supply chain, but really, the story leading up has been about demand. They have repeatedly raised their prices several times in the last couple of months. And how will that impact demand around the world? How would the COVID lockdowns in China impact their Shanghai factory?

But a mixed report, but still say they are on track. It is remarkable to hear about the semi due in December of 2022, when almost no one saw that coming. But a solid, certainly not spectacular, report.

- All right, for more on this, you can the stock up just around 5%. We want to bring in Craig Irwin. He is ROTH Capital Partners Senior Research Analyst. Craig, I guess, first, just your reaction to the number. The stock off, a lot of that I would assume, has to do with the revenue miss.

CRAIG IRWIN: Yeah, I know there was a little too much optimism about pricing, the follow through from the pricing that was put in the second quarter, lifting the top line and bringing that possibly in line with original expectations. Margins missed by, what, roughly 50 basis points? Clearly top line missed because of this.

And they put through the right amount of price to pass through the increased costs that they're seeing. They're not being greedy. They're pricing the vehicles appropriately, such that they can sell them in volume in the market. The problem is they did miss by 19,000 in the quarter.

And I remember back in the day where 19,000 was a daydream for Tesla, as far as deliveries in a year. But that's not what counts now. They missed and expectations were too high.

- Calls coming up at 5:30 Eastern time. Biggest question?

CRAIG IRWIN: Oh my gosh. I think the biggest question for investors is how much stock does he have to sell to fund his Twitter acquisition? I mean, kind of depends where he parked his cash, right? $15 billion he sold.

He could have done well or he could have done not so well and it could be anywhere between $5-$10 billion worth of potential equity sales. That, I think, is really going to weigh on sentiment for investors until we get clarity. Other than that, the guide for units in the fourth quarter is going to be incredibly important. They should be approaching 2 million units in production rate exiting the year with both Austin and Berlin ramping. That's a phenomenal production rate.

We've got to see the demand there and the confidence that they could serve that demand. And that will also have a big impact on the stock. To talk about the stock, though, I think the bigger impact exiting this year, things like Porsche, success at companies like Polestar, and obviously, the upcoming Ford spin off. Those are really impacting investor sentiment as they look at things that are potentially much better valued with similar or maybe even more attractive growth prospects.

- Craig, let's talk about pricing power, because Tesla's cars sold for an average of $57,000 in Q3, up from $49,000 just a year ago. They have been able to pass along those higher prices to consumers. You mentioned the demand aspect of this. Any worry that, that's no longer going to be the case if we do see a bigger slowdown?

CRAIG IRWIN: I'm not worried about demand. I see EVs as inevitable. I think EVs are going to be an increasing mix of transportation no matter what. No matter what we have to do for price, because of the technology integration of the vehicles.

I may be a bear, a loud voice bear on Tesla, but I actually drive an EV. I think the momentum in the market is real. Tesla is the category King and that makes it a difficult path for them to continue to blaze when so many very well resourced companies are coming right behind them.

- So the shares are still down 45% year-to-date and down almost 20% since they slightly missed deliveries. What's the next catalyst to get that stock moving in that direction? And how significant is the Tesla Semi, which we just mentioned, begin delivery in December?

CRAIG IRWIN: Honestly, I see the Tesla Semi almost as a bad joke, right? Because the battery in there, the more range you need on this thing, the bigger battery you have to have, the less cargo you have. So you know it's catch-22. Either you have range or you have cargo. The business model of a semi is to have cargo.

So I see that as a much better match for hydrogen, if people really want an advanced drive train technology. I don't know. I mean, I've met with the man that's the largest piece of the Tesla order book. I think there's going to be a very realistic calibration of these vehicles after they're brought online, after they're commissioned, and the actual sales rate might end up disappointing versus what some of the more aggressive bulls would imagine on this vehicle.

- Craig, let's talk about supply chain because it was one of the supply chain bottlenecks, remaining a immediate challenge. That's what Tesla said in its earnings release. I'm curious from your checks, just that improvement that we have seen there. They didn't know that they are seeing some improvement. I guess, how much improvement are we seeing, and how long do you think it's going to be until we're able to resolve these issues?

CRAIG IRWIN: So a key piece of the supply chain for Tesla is actually Wolfspeed. Wolfspeed had been a little bit behind on their wafer deliveries to both STMicro [INAUDIBLE] on semi. Think some of the upside we've seen in Wolfspeed over the last two quarters has come from the catch up, as they've brought on additional manufacturing capabilities in 6-inch and wafer capabilities there. So that I see as a key component there.

Obviously, connectors can be a major headache. It could even just be harnesses that you outsource these days. So it doesn't have to be an exotic, high technology piece of the build, and everybody's having these problems. Nobody's immune, but I would say that I think Tesla is probably doing one of the best jobs of the companies in the market, as far as managing their supply chain.

- All right. Stock off just around 3.5% on that revenue miss. Craig Irwin, great to have you. Thanks so much for joining us.