No matter how many times the company disappoints the market, Tesla (NASDAQ: TSLA) stock investors keep buying. When Tesla once again missed the consensus analyst estimate for revenue and net losses in the second quarter, TSLA stock dropped more than 12% in the weeks that followed. Yet step by step, shares have worked themselves back up heading into earnings season.
Incredibly, TSLA stock is now up 5% this month as we head into third-quarter earnings on Wednesday. The argument from Tesla stock bulls seems to be this time, things will be different. It’s a familiar cry from the pro-Tesla camp over the past five years. Meanwhile, the Tesla stock price is up just 9% in that time compared to a 52% gain for the S&P 500.
Sure, patterns can always change. But rather than betting this will actually be the time Tesla delivers on its promises, the safer bet may be to expect more of the same.
Numbers to Watch
Of course, there are always the “big three” things to watch when a company reports earnings: earnings per share, revenue and guidance. Analysts are calling for Q3 revenue of $6.34 billion, down 7.1% from a year ago. They are also calling for an EPS loss of 41 cents per share. The big number will be the EPS number, which CEO Elon Musk has said will be break-even. Analysts are skeptical, and so am I.
The big guidance number to watch is full-year deliveries. Tesla has repeatedly said it will deliver between 360,000 and 400,000 vehicles in 2019. After reporting a record 97,000 deliveries in the third quarter, Tesla will need to deliver 124,800 vehicles. That’s not going to happen. So, either Tesla will lower that guidance on Wednesday, or it will make the market extremely uncomfortable by maintaining a guidance range that seems delusional.
Margins are another key number to watch. Tesla has said it is targeting 25% automotive gross margins. In the past three quarters, automotive gross margin has fallen from 24.8% to 20.3% to 18.9%. You don’t need to be an analyst to see those numbers are getting smaller as Tesla ramps Model 3 production.
Tesla’s Problems
Former hedge fund manager Whitney Tilson says Tesla’s margins will continue to suffer as lower-priced, lower-margin Model 3s become an increasing mix of the company’s total production. In other words, the cheaper, lower-end Model 3s are cannibalizing Tesla’s cash cows.
At the same time, Tilson says Tesla demand may not be as solid as it appears at first glance.
“My theory is that current demand is artificially high due to rollouts in new countries and tax incentives. But after Tesla meets the demand of early adopters and/or the incentives taper off, sales will sink,” Tilson says.
He says that phenomenon has already played out with the Model S and Model X in the U.S. Demand popped when the new models were launched, but it has steadily declined ever since. Model S and X deliveries were down 38.4% in the third quarter.
Bank of America analyst John Murphy says the numbers just don’t seem to add up for Tesla.
“While TSLA now believes its business has grown to the point of being self-funding, we remain skeptical that the company can do so without pushing/pulling working capital timing and/or thrifting capex and investment spend,” Murphy says.
Bank of America has an “underperform” rating and $225 target for TSLA stock.
Tilson says the worst may be yet to come for Tesla given there is a wave of new deep-pocketed competition just around the corner as well.
How to Play TSLA Stock
Frequent readers know I haven’t been a fan of TSLA stock since its market capitalization inexplicably gained 550% over a two-year stretch back in 2013 and 2014. But for all the skepticism I’ve expressed about Tesla’s ridiculous valuation, I’ve personally never once shorted the stock.
I stay away from TSLA stock for two reasons. First, shares have the second largest outstanding short position of any U.S. equity, according to S3 Partners. There are too many people short Tesla stock, which provides short covering support and creates the risk of a short squeeze.
Second, the cult-like mentality of TSLA stock bulls means that it doesn’t really matter what the company reports on Wednesday. Second-quarter earnings is a perfect example. Tesla reported an earnings and revenue miss and another massive cash burn. The stock dropped, and then there were three months of buying. Shares are actually higher now than they were then.
I seriously doubt Tesla will report positive numbers on Wednesday. But just how bad those numbers have to be to generate a meaningful selloff in TSLA stock is anybody’s guess.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
