Every Tesla (NASDAQ:TSLA) earnings report is both an exercise in number crunching and an act of visualization. Elon Musk wants investors to think beyond the good news or bad news that’s contained within the report and look to the future. How well Musk can do the second part will play a significant role in the future trajectory of Tesla stock.
Most of the news regarding Tesla’s profits and deliveries in the fourth quarter have already been sliced and diced by analysts, media pundits, auto geeks, etc. There shouldn’t be too many surprises when they report Wednesday after the close.
It’s 2019 where things get a bit murky. I’ll get to that. But first, let’s talk expectations for earnings.
Q4 By the Numbers
The fourth quarter is going to be light years better from the year before.
In Q4 2018, analysts expect revenues of $7.12 billion, non-GAAP EPS of $2.19 and total deliveries of 90,000. Last year, revenues were $3.29 billion, Tesla lost $3.35 a share on a non-GAAP basis, and a total of 30,000 vehicles were delivered in the quarter.
So, that’s 116% year-over-year revenue growth, 165% earnings growth and a 200% increase in deliveries. Almost any business would love to have this kind of growth — but we are talking about Tesla, and nothing’s ever this easy with the electric car maker.
We already know that barring some a miracle, the profit in the fourth quarter won’t be as high as it was in the third quarter. Elon Musk already told us that in his January email to employees about the future job cuts.
“In Q3 last year, we were able to make a 4% profit. While small by most standards, I would still consider this our first meaningful profit in the 15 years since we created Tesla. However, that was in part the result of preferentially selling higher-priced Model 3 variants in North America,” Musk wrote. “In Q4, preliminary, unaudited results indicate that we again made a GAAP profit, but less than Q3. This quarter, as with Q3, shipment of higher-priced Model 3 variants (this time to Europe and Asia) will hopefully allow us, with great difficulty, effort and some luck, to target a tiny profit.”
It’s a rare event to see Musk being so humble and conservative in his thoughts. Perhaps the changes to the company’s corporate governance are helping to reign in his worst impulses.
Nonetheless, Musk was laying the groundwork for more tough decisions at the company. Imagine if Elon Musk ran a company that had no problems to speak of? He would go stir crazy.
No matter what Tesla delivers in the fourth quarter, 2018 has to be considered a significant success, despite Tesla stock delivering a meager 7% return.
The Dreaded Future for TSLA
As I said, this is where it gets murky. Musk is already on record stating Tesla has got a tough road ahead of it.
“While we have made great progress, our products are still too expensive for most people,” Musk stated in his email to employees. “Tesla has only been producing cars for about a decade and we’re up against massive, entrenched competitors. The net effect is that Tesla must work much harder than other manufacturers to survive while building affordable, sustainable products.”
Translation: The business is going to worse before it gets better.
Analysts expect Tesla’s Q1 2019 guidance to include a projected loss. The consensus estimate is a small loss of $2.5 million, worse than the previous estimate (before Musk’s job cuts announcement) of a $63 million profit.
How Musk frames Tesla’s future losses could affect Tesla’s stock price, which has already lost about 14% of its value since the job cuts were announced.
Good Things Are Happening
So, I think it’s likely that Tesla will focus on some of the good things happening currently and in the future.
In February, Tesla starts delivering Model 3s to China and Europe, providing a major growth runway for the company. According to Electrek, the Model 3 is taking business from Toyota (NYSE:TM); estimates suggest that the Model 3 is responsible for approximately 50% of the Prius’s loss in North American market share. As the Model 3 makes its way to the rest of the world, investors can expect more of the same, which is a good thing for Tesla stock.
Another major talking point will likely be future products such as the pickup and Model Y crossover and where they’re at from a development perspective.
“We would not be surprised to see Tesla provide an update on its product road map in part to help support the stock,” said Oppenheimer analyst Colin Rusch recently.
The important thing is that investors get a confident Musk in Wednesday’s report, conference call, etc. Job cuts aren’t easy, so it’s understandable that his tone was subdued and conservative by nature. To give a repeat performance would be a killer to Tesla stock.
The Bottom Line on Tesla Stock
TSLA was wise to do the tough part (job cuts) before it announced fourth-quarter earnings. Now, the smaller profit won’t have nearly the same effect on its stock price.
An honest but confident Musk could do wonders for its share price. We’ll see what Tesla’s CEO has in store for investors come Wednesday after the close.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
