Tesla Earnings Preview: Model 3 Production and Demand in Focus

Tesla Inc. (TSLA) reports earnings after market close on Wednesday, Nov. 1. Here’s a look at what might be expected from the electric vehicle maker’s results.

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So far in the second half of the year, Tesla’s (TSLA) shares have seen quite a bit of volatility. Towards the end of June, shares were trading just shy of the $387 mark. The stock got hammered at the start of July, dropping down to the low $300s, after reporting worse-than-expected deliveries in the second quarter and a target-price drop from Goldman Sachs’ analysts on concerns that demand for older models had plateaued and the company would have trouble meeting upcoming production goals for the Model 3.  

Ahead of the company’s earnings release after market close on Wednesday, Nov. 1, shares have made a similar move, pulling back from an all-time high of $389.61 hit on September 18 to $320.08 at yesterday’s close. Again, the company’s announcement of Q3 production and deliveries that fell short of expectations has been one of the contributing factors in the stock’s recent declines. 

In the third quarter, TSLA said it delivered a total of 26,150 vehicles, broken down to 14,065 Model S, 11,865 Model X and 220 Model 3. Production in Q3 totaled 25,336 vehicles, with 260 Model 3 units produced during the period. CEO Elon Musk had previously said Q3 production of the Model 3 would be around 1,500 units and by the end of December the company would ramp up to producing 5,000 units of the vehicle per week, with a longer-term target of producing 10,000 units of the Model 3 per week.

TSLA attributed the miss to production bottlenecks and said “we understand what needs to be fixed and we are confident of addressing manufacturing bottleneck issues in the near-term.” With reports from several media outlets that large portions of the Model 3 have been produced by hand and Gigafactory-partner Panasonic’s CEO saying battery output could soon be increased, many analysts have indicated they’ll be looking for more clarity around the Model 3 production ramp.

Another area analysts have been focused on is demand for the Model 3. In its second-quarter update, TSLA said it was averaging over 1,800 net reservations per day for its mass-market vehicle, with a total of 455,000 reservations. Musk has said that he thinks annual demand for the Model 3 could eventually reach a rate of 700,000 units.    

Since many analysts had originally based their forecasts on higher Model 3 deliveries, several of them have recently slashed profit forecasts, citing limited profitability from the Model 3, ongoing challenges with the company’s energy business and higher costs due to infrastructure expansion. With the slower-than-expected ramp in Model 3 production, several analysts have also indicated the company could need to raise more capital sooner than they had originally projected as the company continues to operate at a loss. Most recently, the company raised $1.8 billion at a yield of 5.3% through a debt offering. 

Tesla (TSLA) stock chart showing YTD performance compared to S&P 500 and Nasdaq Composite

FIGURE 1: TESLA YTD PERFORMANCE.

Tesla (TSLA) is charted above, compared to the S&P 500 (SPX) as the purple line and the tech-heavy Nasdaq Composite (COMP) as the teal line. Despite the recent pullback in Tesla shares, the stock is still up 47.51% year-to-date, substantially outperforming the broader indexes. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Tesla Earnings and Options Trading Activity

For the third quarter, TSLA is expected to report an adjusted loss of $2.45 per share, compared to adjusted earnings of $0.71 in the prior-year quarter, on revenue of $2.92 billion, according to third-party consensus analyst estimates. Revenue is projected to grow 26.9% year-over-year.

Since September 18, TSLA has pulled back from an all-time high of $389.61, close to the same level the stock was at in mid to late-June, and has recently settled around the low-$320 level ahead of tomorrow’s report. Options traders have priced in about a 6% potential share price move in either direction around the upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term options trading at the November 3 expiration, calls have been active at the 340 and 350 strike prices, while puts have been active at the 300 and 320 strikes. Looking further out at the November 17 monthly expiration, there’s been quite a bit of activity on the put side ranging from the 270-strike to the 320-strike. As of this morning, the implied volatility is on the high end at the 87th percentile. 

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.

Looking Ahead

Tomorrow afternoon, Facebook (FB) also releases its third-quarter earnings. And on Thursday, there’s another series of tech earnings with Alibaba (BABA) reporting before the market opens and Apple (AAPL) and Activision Blizzard (ATVI) report after the market closes. In addition to earnings, it’s also a busy week for economic data. The Federal Open Market Committee wraps up its meeting tomorrow, releasing a statement in the afternoon, and the Bureau of Labor Statistics’ Employment Situation for October comes out on Friday. Don’t forget to check out today’s market update to see what else is going on in the markets.

Good Trading,
JJ
@TDAJJKinahan

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