Tesla pulled out another strong quarter, but turning a profit this quarter and next -- and in the process qualifying for inclusion in the S&P 500 -- will likely be more challenging.
Shares of Tesla (TSLA) - Get Report were trading at an all-time high on Thursday after the carmaker delivered $7.38 billion in revenue and GAAP EPS of $0.58 per share for the fourth quarter, beating consensus estimates on both counts. The company also said it expects 2020 deliveries to “comfortably” exceed 500,000 units. Tesla’s stock shot up 11% to $645.31 on Thursday near the close.
Tesla now has two consecutive quarters of profit under its belt, bringing it closer to the “sustained profitability” long promised by CEO Elon Musk.
But there’s also another potential prize associated with sustained profits: Inclusion in the S&P 500 index, which would afford a new air of prestige to the stock and also likely give it a boost in share price as index funds would need to hold shares.
Among the conditions for inclusion in the index are four consecutive quarters of GAAP profitability. It’s well within the realm of possibility for Tesla, according to CFRA Research analyst Garrett Nelson, but far from a slam dunk.
“The critical quarter is Q1 -- and because the S&P criteria is GAAP earnings, there could be issues for a few reasons,” Nelson said.
One is the coronavirus outbreak. Several companies with operations in China -- such as Apple -- have warned investors that travel restrictions and closure of certain facilities could affect their first quarter results. Tesla, which recently opened its first Chinese factory near Shanghai, told investors that Chinese authorities ordered a temporary shutdown of the factory. Tesla CFO Zach Kirkhorn said they expect the shutdown to delay production by “one to one-and-a-half week(s),” and that first quarter profitability could be “slightly” affected by the shutdown.
“If things worsen, that could certainly stretch to much longer, and that could weigh on earnings,” Nelson added. As of Thursday, analysts polled by FactSet are estimating a narrow GAAP loss of 17 cents per share for the first quarter.
Outside of the public health crisis in China, Tesla has other challenges to overcome in the first quarter as well.
The first quarter is typically a relatively weak one for auto sales. And on the expenses side, Tesla’s full production ramp-up in its China factory will add more startup costs associated with getting the facility to full capacity, as is typically the case in auto manufacturing facilities.
But if Tesla manages to navigate all that and deliver a first quarter profit, it bodes well for the subsequent quarter, according to Nelson.
“If they do post a profit in Q1, we could be reasonably confident they would post a profit in Q2,” he said.