The stakes are high for Tesla when it reports third quarter earnings on Wednesday, as the electric carmaker that once seemed untouchable has begun to test investors who once had great faith.
For the first two quarters of this year, Tesla’s revenue growth has failed to meet expectations, while losses have been larger than expected. Meanwhile, Tesla’s stock is down nearly 20% since the start up this year.
Like any growth business, Tesla’s stock price is based as much on future expectations than current reality. That’s why the price of Tesla stock fluctuates about 50% more than GM’s: New real-world data has an outsized impact on investor predictions about the company’s future growth and potential investment returns.
Here’s what investors will be listening for on Wednesday:
1) Profitability
No surprise, Tesla’s profitability is the first thing investors are watching. There’s unlikely to be any profit as such. Wall Street forecasts a 45 cents per share loss on revenue of $6.5 billion.
But that’s not doom for a company like Tesla, which is spending big on a Chinese factory, self-driving technology, and new models. Simply constraining overall losses would help restore the animal spirits in Tesla bulls.
2) Gross margins
At least as important as overall profitability, though, are Tesla’s gross margins for its auto business, or profits excluding certain corporate expenses like research and capital investment. The gross margins, in other words, are what drive investor returns long-term.
Gross margins are particularly important because Tesla is in the middle of a tricky maneuver. As it seeks to become a mass-market carmaker, the company is shifting focus from the highly profitable luxury Model S and Model X, whose sales have declined sharply, to the lower-cost, and lower profit, Model 3.
Tesla’s automotive margins have been nudging down under that pressure, from 20.6% in the second quarter of 2018 to 18.9% in the same quarter this year.
There are reasons to think the slide in margins could halt or reverse this quarter. One reason, according to analyst Toni Sacconaghi of Alliance Bernstein, is growth in the number of vehicles that Tesla is leasing. Leases are particularly profitable, which could provide “a modest boost” to gross margins. Sacconaghi also says margins for the Model 3 could be “flattish to slightly up,” an improvement that could be very good news for Tesla’s stock.
3) Ramping up
Tesla leadership will also answer questions from analysts on Wednesday, providing an opportunity for them to discuss bigger-picture matters than quarterly numbers. One topic that’s nearly certain to come up is what the company is doing to speed up its car manufacturing and delivery.
As usual, Tesla released its quarterly delivery numbers earlier this month. They were a mixed bag, showing 2% growth to 97,000 cars for the quarter, but falling short of CEO Elon Musk’s internal target of 100,000.
Tesla says its order backlog increased in the third quarter, and investors would love to hear about the company’s plans to get cars to buyers more quickly. One report that has not been confirmed by the company, for instance, says Tesla is considering creating dealership-like “Tesla Centers” to make deliveries faster by keeping inventory closer to customers. Any insight into plans to overhaul the delivery process would be very significant.
4) China Gigafactory
While production is accelerating this year at its car factories in Fremont, Calif. and Reno, Nev., Tesla’s next big increase in output, and potential future profitability, will come from its new factory in China. Some reports say that the Shanghai ‘Gigafactory’ could start producing Model 3s in China as soon as this month.
Joe Osha, an analyst for JMP Securities, expects the Shanghai Gigafactory to produce 5,000 to 10,000 cars in the fourth quarter. Turning those cars into sales would bring a meaningful change to key fourth quarter metrics.
5) New models
Even more important for Tesla now is its next car, the light SUV Model Y, according to Osha. Getting a toehold in the category would be a major coup, since light SUVs are already extremely lucrative and popular for established manufacturers of gas-burning cars. “If they can hit that price point with a decent product, that matters a lot,” Osha said.
The Model Y is expected to reach the market in 2020, at the very competitive base price of $39,000. But, like so much else about Tesla, its success remains a long-term unknown.
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