For any other company in the market, this week’s earnings report from Tesla (NASDAQ: TSLA) would be critical. The core of the bear thesis against TSLA stock is that the company has never demonstrated it is or can be consistently profitable. Tesla shares have rallied about 142% in the past six months on the hope that this time it’s different.
If Tesla reports another profit in the first quarter of 2020, it will make three quarters in a row. That would be a first for the company. If not, it’s a sign that, despite nearly tripling in value, little has changed for Tesla from a fundamental standpoint.
Tesla bulls have been crying “this time it’s different” for years now. And despite the fact that the company has done very little to justify that rally cry, the stock keeps trading higher.
I’m assuming Tesla will once again drop back to an earnings loss in the first quarter. But it’s unlikely Tesla’s cult followers will care about numbers.
Numbers to Watch
For all other auto companies, there are three critical earnings report numbers to watch: earnings per share, revenue, and guidance. Analysts are calling for Q1 revenue of $4.54 billion for Tesla, up 31.8% from a year ago. They are also calling for an EPS loss of 23 cents per share. In my mind, the big number is the EPS number. CEO Elon Musk and Tesla bulls have repeatedly insisted that the company is self-sustaining and profitable, despite a $2.3 billion capital raise just two months ago.
The big guidance number to watch is full-year deliveries. Tesla delivered 367,500 vehicles in 2019, missing the midpoint of its guidance range of 380,000 vehicles. This year, Tesla has said it will “comfortably” deliver 500,000 vehicles. Tesla reported 88,400 deliveries in the first quarter. That number means Tesla will need to average 137,200 deliveries in each of the next three quarters to “comfortably” hit 500,000 for the year.
That’s not going to happen. Either Tesla will drop its guidance on Wednesday or it will make everyone uncomfortable by pretending like it will hit a target that is delusional given the current state of the global auto market.
Another key number to watch in the report is automotive gross margins. Tesla has repeatedly said it can achieve 25% automotive gross margins at scale. In the past three quarters, Tesla reported automotive gross margins of 18.9%, 22.8% and 22.5%. Margins seem to be trending higher, but they stalled out at around 22.5% in the past two quarters.
The Ultimate Cult Stock
Bank of America analyst John Murphy recently downgraded TSLA stock to “underperform” with a $485 price target, suggesting 33% downside. Murphy says Tesla’s first-quarter delivery numbers were “not great” and says the stock is overvalued following its insane six-month run.
“We would note that TSLA faces an element of mix degradation into 2020 as lower-priced Model 3 variants begin to comprise a larger portion of volume, which will likely pressure margins, profits, and cash flow,” Murphy says.
Now that we’ve outlined the numbers that should matter for Tesla for a business perspective, it’s time to explain why those numbers won’t actually matter. Former hedge fund manager Whitney Tilson recently said Tesla is the ultimate cult stock because its investors have pledged devotion to the stock and its CEO Elon Musk no matter what.
“Forced to pick a number, I’d say two-thirds of the stock is in such hands – people like Ron Baron of Baron Capital (who just said Tesla could generate $1 trillion in annual revenue within a decade), Catherine Wood of ARK Invest (who has “‘very high confidence’ that the stock will hit $7,000 within five years), Arne Alsin of Worm Capital…and countless individual investors like my analyst Kevin DeCamp (who has owned it for years and says he’s holding until it’s his first 100-bagger),” Tilson says.
How to Play TSLA Stock
As I’ve said many times, there is only one way to play TSLA stock: don’t. I’m guessing Tesla will report another earnings loss and automotive gross margins well short of 25%. I’m guessing it will cut or withdraw its 2020 guidance. If it doesn’t, that might be even worse given the hit its credibility would take.
But I’m also guessing it won’t matter for Tesla investors. They have already proven that they don’t need the company to hit its targets, follow through on its promises, or demonstrate a viable business model. They have a story in their head that justifies a valuation of $133 billion for Tesla in the middle of a recession.
Tesla is the type of stock that doesn’t make sense to short or to buy. I wouldn’t touch it with a 10-foot pole.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan does not hold a position in any of the aforementioned securities.
