For a capital-hungry company like Tesla Inc. (NASDAQ:TSLA), managing expectations is the key to survival. Take the second quarter, reported after trading closed Aug. 2. The official earnings estimate was a loss of $1.76 per share on revenue of $2.59 billion. But the “whisper number” — the number analysts were telling their best customers to expect — was for a loss of $1.87 per share.
That is a pretty low bar to clear. The revenue estimate was lower than the $2.7 billion brought in the previous quarter. The expected loss would be just short of the $2.04 per share loss in the March quarter.
Yet for this, investors had bid the market cap to $53.4 billion? That’s about 6.5 times forward sales, and let’s not talk about earnings. For a company that has never made a dime over a full year. Other than that, Mrs. Lincoln, how was the play?
Squeeze Those Shorts
The play was excellent, it seems.
For the quarter ending in June Tesla lost $1.33 per share, on revenue of $2.79 billion. Both numbers beat estimates, and the whisper numbers, handily, and the stock immediately shot up 2.5% in after-hours trading, after rising 2% during the trading day. Auto revenue was down from the previous quarter, but battery sales more than made up for the shortfall.
By managing expectations, CEO Elon Musk can watch his stock go up because he’s squeezing shorts — creating buying pressure that forces those who’ve bet on a stock price decline to cover their bets, buy stock and raise the stock price further.
That is what has happened during the last three months. Short interest in Tesla plunged, meaning shorts bought Tesla stock to close out their positions and took their losses. Remaining shorts were hurt by the new numbers, and may be forced to cover at even higher prices than before.
Crossing the Line to Manufacturing Hell
There remain reasons for pessimism, however. Tesla is crossing a line this quarter, from a company making a few copies of a very-hyped product to a company trying to mass produce cars and electric batteries.
It does not help that Tesla’s director of battery technology, Kurt Kelty, suddenly resigned to “pursue other opportunities,” amid a production shortfall that has already limited production of the Model S.
It also doesn’t help that workers are complaining about their pay and safety, threatening to form a union. The dangers of working in the factory are being compared to sawmills and slaughterhouses. Musk himself has admitted that the next six months will be “manufacturing hell.” Even the robots might unionize.
For now, Musk’s reality distortion field, his management of expectations that make a loss look like a win, can get stock analysts who only fear carpal tunnel syndrome off the production issue, but push is eventually going to hit shove.
Musk’s ability to defy financial gravity is getting on other billionaires’ nerves, like investor David Einhorn, who said during the earnings call for his Cayman Islands-based insurer, Greenlight Capital Re Ltd. that Tesla is burning through too much cash. Musk might respond he’s also got losing bets now against AthenaHealth Inc. (NASDAQ:ATHN) and Amazon.com, Inc. (NASDAQ:AMZN) but, MAGA!
What Happens Next?
Expect a rising stock market on Aug. 3, with Fitbit Inc. (NYSE:FIT) and Square Inc. (NASDAQ:SQ) also sitting in the earnings winner’s circle alongside Tesla.
On a day when the Dow Jones Industrial Average hit 22,000, thanks to Apple Inc. (NASDAQ:AAPL), analysts were happily chatting about how fast it might hit 23,000, and whether Tesla might be in the Dow when it does.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
