Tesla Reports Earnings on Wednesday: 3 Things to Watch For

After a historic run-up in shares, expectations are riding high heading into Tesla's fourth quarter earnings.
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It’s been a good few months for Tesla (TSLA) - Get Report investors -- and for Elon Musk.

The carmaker’s valuation crossed the $100 billion mark for the first time last week, triggering a potential bonus payout of $350 million for Musk. That milestone followed a months-long rally in shares fueled by a third quarter profit, faster-than-expected progress on Tesla’s Shanghai Gigafactory and fourth quarter vehicle deliveries that exceeded forecasts.

Soon, Tesla shares will face a key test in its full fourth quarter financial results, which will give investors a fuller picture about how the carmaker’s various initiatives are hitting the bottom line.

Analysts polled by FactSet are expecting non-GAAP EPS of $1.65 per share on $6.95 billion in revenue. Here are a few issues to watch for when Tesla reports its fourth quarter results on Wednesday, Jan. 29 after the close.

1. China Factory

Among the factors driving optimism around Tesla is its Shanghai Gigafactory, which officially opened a few weeks ago. And expectations are high that the new facility will be able to produce Teslas inexpensively and at a high volume, and help Tesla gain a strong position in the Chinese market. 

In its fourth quarter report, investors will learn more about whether the high expectations match reality, and Tesla management will likely share more on how the pace of production is shaping up at the new facility. As CFRA Research automotive analyst Garrett Nelson told TheStreet, production ramp-up at the new facility could pressure automotive margins, which remains a closely-watched figure among Tesla investors.

2. U.S. Demand

Despite its forays into markets like Europe and China, the U.S. is still Tesla’s largest sales market -- so any sign of weakness at home could present a risk. Tesla’s Model Y is set to debut later this year -- but so are 18 other electric vehicles in a range of price points. What’s more, federal EV tax credits are no more.

So it remains to be seen whether Tesla will remain the standard-bearer for electric vehicles in the U.S. given an array of new options entering the market in coming years. Investors will keep a close eye on Tesla’s delivery guidance for any signs of competitive pressure. 

3. Cash Flow

Tesla investors have seen positive trends in cash flow and profitability over the past few months, but the carmaker has a few costly initiatives coming down the pike. One example is a planned German factory, projected to open in July 2021, which could cost roughly twice as much as the Shanghai facility. 

Construction of a new, expensive facility could eat into Tesla’s free cash flow this year, potentially damaging its financial results. Given that Tesla had to implement heavy spending cuts to achieve modest free cash flow in 2019, this is another important data point to watch for Tesla’s fourth quarter and for the rest of the year.