The bar for Tesla is much higher than it looks
Qilai Shen/Bloomberg
Tesla will easily beat earnings expectations this coming week. But that beat might not be enough to drive the stock higher.
Tesla (ticker: TSLA) will report on Wednesday. For the third quarter, Wall Street expects $1.54 in per-share earnings from $13.7 billion in sales. In the second quarter, Tesla earned $1.45 a share from $12 billion in sales. Wall Street expects the company to make about a dime more on an incremental $1.7 billion in sales.
Investors, however, need to be ready for the sandbag—when a company guides low and then crushes expectations. That’s usually a good thing. Tesla, however, doesn’t provide guidance, so investors have to rely on Wall Street estimates to judge whether the company “beat” or “missed.” This time around, the estimates from analysts look far too low, creating the possibility of wild post-earnings trading in unexpected directions.
Things should be better than analysts project. Tesla delivered a record 241,300 vehicles in the third quarter, up from 201,250 in the second quarter. That’s a 20% increase. Tesla’s average price per car in the second quarter amounted to roughly $49,000, and while that number can change, 40,000 more vehicles could easily mean about $2 billion more in sales.
Wall Street also expects Tesla’s profitability to drop. Gross profit margins are projected to be just below 24%, compared with just above 24% in the second quarter. That might be conservative, just like sales projections. The entire auto industry is dealing with higher costs because of global supply-chain issues. But there’s another reason profitability could be better than current estimates.
Tesla delivered a record number of cars in China during the third quarter—almost 74,000, up about 20% compared with the second quarter. The cars Tesla produces and sells in China have higher margins than those made there and exported to Europe. With Tesla delivering about 12,000 more vehicles in China during the third quarter compared with the second quarter, profit margins could hold up.
None of this is a secret, and analysts have been updating their third-quarter earnings estimates—on average, they’re now about a dime per share higher since the end of September. RBC analyst Joe Spak took his quarterly earnings estimates up to $1.95 a share from $1.68 after delivery results came out. Baird’s Ben Kallo and Wedbush’s Dan Ives are more optimistic about Tesla’s stock—both have Buy ratings, while Spak rates it a Hold—but neither updated their third-quarter earnings estimates of $1.21 and $1.22 a share, respectively.
Together, that means the bar for Tesla is much higher than it looks. That’s particularly true because its stock has gained about 30% over the past three months, closing the week at $843.03—even as the S&P 500 added 2.6%. That means Tesla will likely need a huge beat to give the stock a jolt, something close to $2 a share.
Whether it can pull that off remains to be seen.
Write to Al Root at [email protected]
