TSLA Stock: Will Q4 Earnings Be up to Snuff?

by Jim Woods | February 18, 2014 3:12 pm

Over the weekend while looking ahead to Tesla Motors’ (TSLA[1]) upcoming earnings report, I read news reports[2] that CEO Elon Musk had met with Apple’s (AAPL[3]) head of mergers and acquisitions. The revelation of this meeting caused some to speculate that TSLA stock was being eyed by Apple for a potential merger.

tesla-earnings-tsla-stockMy first thought, however, was something like, “So, Elon Musk is about to buy Apple.”

I jest, of course, because despite the genius of Musk and all his success, he’s in no position to acquire the mammoth AAPL.

Yet when it comes to TSLA and Elon Musk, the impossible really isn’t.

Just take a look at how he’s nearly single-handedly changing the automotive industry with his luxury all-electric vehicles, particularly the Tesla Model S sedan. Musk also is changing space exploration with his privately held firm SpaceX, and the for-profit Falcon 9 commercial rocket ship. Conventional wisdom says the auto and space industries aren’t supposed to be shaken up by a Silicon Valley entrepreneur, but Elon Musk isn’t on the list to receive conventional wisdom memos.

In terms of an investment, well, TSLA stock is just about as good as it gets. Shares currently trade near their all-time highs, and over the past 12 months the stock is up nearly 450%. Yes, you read that correctly. Incredibly, TSLA stock is up more than 950% over the past five years, making it one of the greatest success stories in recent stock market history.

Of course, no party lasts forever, even if that party’s hosted by Elon Musk.

On Wednesday, Tesla earnings for Q4 will be announced, and the data we get in a few key metrics will likely tell us if TSLA stock party is winding down, or if things are just starting to gear up for Tesla.

Here are two things that I, and other TSLA stock bulls, want to see from Musk and company on Wednesday.

A Strong Tesla Earnings Beat

Despite chatter about revenue and EPS already being priced into TSLA stock, the company still has to beat on both the top and bottom lines, and it has to do so in strong fashion. Wall Street is used to seeing Musk & Co. best expectations, so any hint of a Tesla earnings or revenue number that’s below consensus estimates will put a huge damper on shares.

According to analysts polled by Thomson Reuters, Tesla earnings for Q4 are expected to race in at $27.8 million, or 19 cents per share, on revenue of $663.3 million. This metric could be a bit tricky to assess if you look at the numbers expected when you exclude one-time charges, so keep that in mind when you’re judging the numbers Wednesday.

Now admittedly, the importance of the Q4 numbers has been blunted a bit here because of Tesla’s announcement last week that it had delivered 6,900 Model S units in the quarter, well above the company’s guidance for fewer than 6,000 vehicles. Still, the top and bottom lines need to come in strong, and without that there won’t be much merriment in TSLA stock.

Strong Guidance for TSLA

By far the biggest key to keeping the music playing at the TSLA stock party is the guidance the company is going to provide for 2014. Wall Street wants to hear directly from Musk and the rest of management about how many cars it thinks it can deliver in 2014.

According to the buzz among auto industry and investment experts I’ve spoken with, the number everyone wants to see is somewhere near 40,000. That number certainly would please the bulls, as it would represent a huge increase over the 25,000 units delivered last year. If, however, Tesla is conservative with its guidance on the number of units it can sell (say in the 30,000 range), then we could see the shares come under heavy selling pressure.

Another important guidance metric to look for is gross margin. In other words, how much money is Tesla making on each unit sold? This number often is clouded by the inclusion of the revenue Tesla makes from selling California’s ZEV (Zero Emission Vehicle) credits, and to be certain this does have an impact. Until there’s some change in the current status of these credits, one has to include the revenue of ZEVs when considering Tesla earnings.

In recent years, TSLA has increased gross margins substantially, from 7.3% in 2012 to nearly 24% in Q3 2013. During Tesla’s Q3 conference call, Musk said that was “pretty confident” that the company would reach gross margins of 25% in Q4, and that’s without including revenue from ZEVs. If the gross margin figure can hit Musk’s prediction, then I think we’re looking at a huge boom higher in TSLA stock from here.

Of course, the flip side to the gross margin coin is that if the numbers disappoint, TSLA stock could be subject to a wave of profit taking from momentum traders already sitting on massive gains.

Bottom Line

If you’re a TSLA stock holder, and if you’re bullish on the company like I am, then Wednesday is a day to look forward to. That’s because when it comes to these two aforementioned key metrics to watch, I think you’ll be very pleased.

However, if the data changes and if Tesla earnings fail to impress, it never hurts to be nimble and to act in defense of your own money by protecting gains.

As of this writing, Jim Woods was long TSLA.

  1. TSLA: http://studio-5.financialcontent.com/investplace/quote?Symbol=TSLA
  2. read news reports: http://www.sfgate.com/news/article/Apple-exploring-cars-medical-devices-to-reignite-5239850.php#page-1
  3. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL

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