Can Tesla pull off a positive earnings surprise -- again?
Following a blowout third quarter that sent the stock soaring in the aftermath, Tesla (TSLA - Get Report) is preparing to post its fourth-quarter earnings on Wednesday after the close. Tesla's volatile stock ended Tuesday at $297.46.
As always, perspectives on the polarizing electric car maker are mixed, but below are some of the issues and questions that could arise in Tesla's latest report.
1. Earnings Could Disappoint
In a Jan. 18 letter to employees, which announced a 7% layoff, CEO Elon Musk wrote that "In Q4, preliminary, unaudited results indicate that we again made a GAAP profit, but less than Q3." He also added that shipment of higher-priced Model 3 variants, particularly in Europe and Asia, would "hopefully" allow Tesla to target a "tiny profit" this quarter. In a recent note, Loup Ventures' Gene Munster interpreted those comments to mean that Tesla could report earnings per share between $1.00 and $2.00 -- well short of Wall Street's consensus of $2.20 per share, according to FactSet. He added that March guidance could also disappoint, interpreting Musk's noncommittal language as an attempt to temper expectations.
2. Sustainable Profitability
CEO Elon Musk has often stated that he expects Tesla to be profitable on a continuous basis, and last quarter, the company blew away Wall Street's expectations in reporting a GAAP net income of $312 million and vastly stronger earnings per share than had been anticipated. Whether Tesla can sustain that going forward is the question. Having slashed its headcount by 7% earlier this month, it's endeavoring to reduce its overhead. But it may not be enough to achieve the sustainable profitability that Musk had vowed to achieve, at least not yet. In a recent note, Cowen's Jeffrey Osborne argued that the staff reduction would be sufficient to hit profitability when Tesla finally sells the $35,000 Model 3 that has been long promised -- but Tesla just isn't there yet. "What is now clear is that the company has a global steady state demand of well below the current run rate of <5,000 Model 3s per week without introducing this low priced version," Osborne wrote.
3. Model 3 Demand
In his recent letter, Musk warned employees of a "very difficult" road ahead and reiterated that one of Tesla's core challenges is producing a $35,000 Model 3 at scale. "Higher volume and manufacturing design improvements are crucial for Tesla to achieve the economies of scale required to manufacture the standard range, standard interior Model 3 at $35k and still be a viable company," he wrote. At the same time, many analysts and bullish investors have questioned whether Model 3 demand is the real issue. In recent months, Tesla has sought to place focus on its emerging business in Europe and China as a new source of demand for Model 3s. It plans to begin shipping Model 3s to Europe starting in February, and reports have suggested that it may be as many as 3,000 per week. While Tesla typically doesn't share data on total orders in its earnings reports, investors will be closely tuned to signs of how future Model 3 demand is shaping up.
4. Quality Control
As Model 3 production ramped up in the back half of 2018, Tesla doubters argued that quality, logistics and customer service has suffered, leading to long delivery times, lengthy waits for service and quality problems with the cars. A review of Twitter posts circulated by Tesla short-sellers will turn up photos of lots filled with undelivered Teslas, and whether this is a demand issue, or a logistics issue is frequently dissected. If such reports make up an accurate picture, Tesla's brand could take a serious hit. In a December 2018 tweet, Musk told followers that Tesla plans to open up a number of new service centers, and investors will be on the lookout for signs that any quality issues are properly addressed.
5. Looming Debts, and How to Pay Them
In its last earnings, Tesla reported a significantly improved free cash flow position. But with a debt deadline fast approaching -- it has $1.5 billion worth of convertible debt due this year, including $920 million due in March -- investors are eager for more information on how Tesla plans to pay off the debt while satisfying its other promises, like building a Gigafactory in China. "We continue to believe Tesla will need more capital to fund its expansion, and would hope for a more detailed plan around the company's capitalization and capital allocation strategy particularly since management's prior plan to pay down debt and fund future growth with generated cash now appears to be a less likely option," Cowen's Osborne added.
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