Tesla Reports Earnings on Wednesday: 4 Keys to Watch

Tesla investors are looking for a profit this quarter, which would qualify Tesla for inclusion in the S&P 500 index.
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With Tesla Inc.  (TSLA) - Get Report reporting its latest financial results this week, investors are looking for a key milestone that could spur a wave of buying activity in the stock. 

The electric carmaker is on the cusp of inclusion in the S&P 500 index, and bulls consider it a "fait accompli," according to Wedbush analyst Dan Ives. To be eligible for the index, Tesla needs to post a profit for the second quarter, which is the first full quarter that overlapped with the COVID-19 pandemic.

To prepare for Tesla earnings, follow Tesla Daily on TheStreet as the innovative auto company reports earnings after the bell Wednesday.

The stakes are significant for Tesla investors, and CEO Elon Musk, as inclusion in the S&P 500 would trigger a big wave of index fund buying. But posting positive earnings this quarter isn't a sure bet. 

Here are some themes to watch in Tesla's upcoming report. 

1. Impact of Price Cuts

To help stimulate demand, Tesla announced several price cuts this year both in the U.S. and in China. Just last week, it slashed prices for Model Y unit in the U.S.; in late May, it reduced prices across its lineup. Analysts are mixed on whether this amounts to a savvy business move or a red flag that organic demand is lagging. 

Tesla's quarterly revenue stacked up against the 90,650 vehicle deliveries it reported earlier will shed light on the impact of price cuts on Tesla's top line. And the company's commentary on the quarter, and forward-looking statements, may reveal more on the rationale of the price cuts and how they may affect Tesla's results going forward.

2. Free Cash Flow

Tesla shares have had a historic run-up over the past few months, despite the impacts of COVID-19. It's now the most valuable automaker in the world, with its valuation exceeding $300 billion. According to CFRA analyst Garrett Nelson, "[Tesla] shares have gotten ahead of underlying fundamentals and do not appropriately reflect various risks surrounding the story, including the fact TSLA is entering a major spending cycle with the construction of Gigafactories 4 and 5."microsoft and dell

3. China Demand

The potential for China to become a major sales market for Tesla is a linchpin of the bull thesis, and it appears that EV sales in China have rebounded from earlier lows tied to COVID-19. According to China's Passenger Car Association (CPCA), Tesla sold 14,954 Model 3 vehicles in June, up from 11,095 units in May and 3,635 units in April. According to Ives,  "strong Model 3 demand out of China remains a ray of shining light (and we believe was a clear standout in 2Q) for Tesla in a dark global macro." He estimates that Tesla could deliver 150,000 cars in China this year and that the China growth story could be worth "at least $400 per share" as production ramps up over the next 12 to 18 months. 

4. Full-Year Outlook 

Weeks ago, Tesla told investors that it delivered 90,650 units over the three months ending in June -- well ahead of Wall Street's consensus forecast of 72,000. It has not yet updated its full-year delivery guidance, however. Prior to the pandemic, Tesla told investors that it would easily deliver 500,000 vehicles this year. It's delivered around 179,000 in the first half. Last quarter, Tesla said that it would "revisit" its full-year guidance in its second-quarter release, and will likely give comments on what to expect on the demand side for the rest of this year.