Electric Earnings Shock? Tesla Faces Potentially Bumpy Road on Revenue

There seems to be a little bit of extra tension going into Tesla's Q3 earnings report as third-party analysts are predicting the electric automaker might see its first decline in yearly revenue in years.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Electric fill-up: Tesla earnings ahead
5 min read
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Key Takeaways

  • Automaker would have to deliver more than 100,000 cars in 4Q to hit goal
  • Deliveries have skewed toward lower-margin Model 3s
  • Company has $566 million in debt that comes due in November

When Tesla (TSLA) reports earnings Wednesday after the bell, investors will likely continue to look for clues about whether the electric vehicle maker will be able to meet its full-year vehicle delivery forecast. They’ll probably also look at TSLA’s cash flow and whether it is getting closer to returning to profitability.

But there also seems to be a little bit of extra tension going into this Q3 earnings report as Wall Street analysts are predicting the company might see its first decline in yearly revenue in years. If third-party analyst projections of $6.34 billion in revenue turn out to be on target, it would be TSLA’s first annual drop in revenue since 2012. As for the bottom line, analysts are expecting a loss of 41 cents per share.

After a Rough Spring, Shares Have Been Revving Up

A projected loss hasn’t stopped TSLA’s shares from rallying ahead of its earnings report—though shares are still down about 25% year-to-date (see figure 1 below). Earlier this month, the car maker said it had record deliveries of approximately 97,000 vehicles in Q3, apparently exciting investors enough to move the stock from a low of around $230 this month to above $250 despite the figure on deliveries – arguably the single biggest metric watched by investors – being short of analysts estimates. 

Recall that last quarter TSLA reported a loss despite delivering a record number of vehicles. That quarter bears similarities to what is happening now. The record Q2 deliveries helped goose shares higher, but investors saw them come plunging back down after the company reported the loss. 

As Tesla shoots for a delivery goal of between 360,000 and 400,000 vehicles, the latest numbers show that the company has its work cut out for it. To even meet the low end of that range, Tesla would have to deliver 104,800 cars during Q4.

While Tesla has never delivered more than 100,000 vehicles in a single quarter, in its release reporting the latest delivery figures the company said it had achieved record net orders in Q3 and was entering Q4 with an increase in its order backlog. So this week in its earnings report or in its conference call with investors, it could be interesting to see whether TSLA sticks with its guidance on yearly deliveries.  

Tesla chart

FIGURE 1: DRIVING THROUGH POTHOLES?  TSLA shares pierced the $180 level to the downside in early June, but drove out of the rut soon after. Since then, the stock has bounced off the $260 level a few times.  Data source: Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Scrutiny on Margin, Cash Flow

Meanwhile, while the increased delivery numbers are a good sign, the latest delivery numbers from this month also point to another headwind for Tesla, that of margin. During Q3, nearly 80,000 of TSLA’s deliveries were of the Model 3, which costs around $39,000 compared with roughly $85,000 for its Model X. In addition to record deliveries, Tesla also had record production of 96,155 vehicles, but again nearly 80,000 of those were the Model 3. An increasing proportion of lower-margin product could make it harder for the company to return to profitability. 

While investors have already seen delivery and production figures, they’ve been having to wait to for the financial release Wednesday to see the company’s cash position, which is usually something that gets pretty close scrutiny. Tesla’s cash situation could be particularly important this time around as the company has $566 million in debt that comes due in November. 

One thing overshadowing the rest of the year is whether the U.S consumer will remain resilient. We’ve already seen a downturn in manufacturing, and retail sales have shown signs of weakening. If people begin to fret about their business prospects, they may not want to shell out tens of thousands of dollars for a car.

China Production, Model Y In Headlights

This week, in addition to looking for clues about whether Tesla can hit its delivery goal, investors also will probably be keeping an ear to the ground on the company’s Chinese production effort and plans for production of its Model Y compact crossover utility vehicle. Any updates from management for either would be interesting. 

Over the longer term, it seems likely that there will be increasing competition in the electric vehicle space from other makers. But while many automakers have introduced electric vehicles already, Tesla still seems to have a certain cache, especially with younger investors, and still seems to be perceived by many as the cool kid on the block. 

The company’s stock has been a long-time favorite of younger investors, according to the Investor Movement Index® (IMXSM ), a proprietary, behavior-based index created by TD Ameritrade designed to indicate the sentiment of retail investors.

More broadly, many people want to see if electric vehicles are viable long-term products, and with Tesla at the forefront of that experiment, it will likely continue to be a closely watched company this week and in years to come.

TSLA Earnings and Options Data

Tesla is expected to report an adjusted loss of $0.41 per share according to third-party consensus analyst estimates, down considerably from the year-ago period, when the company reported a profit of $2.90 per share. Revenue is projected at $6.34 billion, down about 7% from a year ago. 

The options market has priced in an expected share price move of about 6.8% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform. 

For the October 25th weekly expiration, call activity has been highest at the 265, 280 and 300 strikes, while puts have been active at the 230 and 250 strikes. The implied volatility sits at the 30th percentile as of Tuesday morning. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time. 

Good Trading,
JJ
@TDAJJKinahan

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Key Takeaways

  • Automaker would have to deliver more than 100,000 cars in 4Q to hit goal
  • Deliveries have skewed toward lower-margin Model 3s
  • Company has $566 million in debt that comes due in November
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