Tesla Inc (NASDAQ:TSLA) stock doesn’t generally move a lot with quarterly earnings. At the moment, TSLA stock is a long-term play. It’s an argument over what cash flows will be in 2028, not in 2018. And so beating or missing analyst expectations is a single quarter simply doesn’t change the story all that much.
But Tesla’s fourth-quarter earnings report on Tuesday afternoon may be an exception to that rule. With so much focus of late on Model 3 production, investors will be closely scrutinizing Tesla’s progress. I doubt production figures will change investor sentiment all that much: both bulls and bears are firmly dug in when it comes to Tesla stock. Still, TSLA stock has the possibility of a big post-earnings move next week — in either direction. And that hasn’t always been the case.
Model 3 Production Will Be Key
Of late, Tesla earnings simply haven’t really been that material to TSLA stock. The company missed estimates in its Q3 report, posting its biggest loss ever — yet the focus was on production cuts of the Model X and Model S. Tesla stock fell 7% and hit a six-month low. But the stock rebounded almost instantly; it’s since gained 15%, with investors simply shrugging off the miss.
So for Q4, I doubt the raw numbers will matter all that much. Rather, investors will focus on how Tesla got there. And the most important number on that front will be Model 3 production.
Tesla already has missed production targets for the 3 — part of a long-running pattern, as I’ve pointed out before. A CNBC report on January 25th suggested that delays were worsening, raising the stakes for Tuesday’s report.
The production run-rate is going to be the key number coming out of earnings. But bear in mind that the long-term bull case for Tesla relies on it not just selling cars — but doing so with innovative, and higher-margin processes. If Tesla is hitting already-lowered targets by making batteries by hand, as some reports suggest, that may not be good enough. On the other hand, if Tesla can convince investors that the Model 3 is headed in the right direction, with deliveries climbing and production scaling, a key pillar of the near-term bear case gets knocked out.
Will It Matter?
While the Model 3 will be the most important piece of Tesla’s earnings, will it really affect TSLA stock prices?
InvestorPlace’s Luke Lango, who is bullish on TSLA stock, gave a good summary of why many TSLA bulls are nonchalant about production misses:
Yes, Model 3 production is abysmally slow right now. But production of the Model X and Model S were also abysmally slow at one point. Eventually, TSLA figured out production bottlenecks on those cars, and now, the company is shipping more than 25,000 Model S and Model X vehicles per quarter.
Is another missed production target going to get TSLA bulls to abandon ship? Is improved production going to dissuade TSLA bears who see CEO Elon Musk as not a pioneer, but — in some cases — closer to a con artist?
Probably not. But this quarter’s numbers remain important — and enough to move TSLA stock. As Lango points out, Tesla has been here before in terms of production ramp for the S and the X. But the Model 3 is different — and so expectations are different. Indeed, the biggest move in Tesla stock in 2017 came not after earnings — but after production concerns first arose back in July.
Model 3 is supposed to be the car that propels Tesla into the mass market. Its production target isn’t 25,000 cars a quarter — a target it’s currently missing. To compete with other auto manufacturers, production needs to eventually ramp to more than ten times that figure .
And that ramp needs to come before competition catches up to Tesla. General Motors Company (NYSE:GM) is aggressively going after the EV space. So is Toyota Motor Corp (ADR) (NYSE:TM). Ford Motor Company (NYSE:F) changed CEOs to add more tech experience to the top job. Meanwhile, Alphabet Inc (NASDAQ:GOOGL,GOOG) unit Waymo appears to be leading the autonomous driving race. Tesla can’t take forever.
Buy or Sell TSLA Stock?
It’s tough to take a firm bullish or bearish side heading into earnings. I’ve leaned bearish toward TSLA of late, seeing some cracks in the bull case. I wouldn’t be stunned to see those cracks widen coming out of Q4 if Tesla can’t convince investors it’s on the right track.
But I’m hardly willing to bet against TSLA stock; indeed, I’ve never held a position. My best guess is that whatever happens on Tuesday, both bulls and bears will claim it proves their respective points. The battle over Tesla stock will continue – and the rest of us will watch from the sidelines.
As of this writing, Vince Martin has no positions in any securities mentioned.