[October.2024] Four Things to Consider When Reading Tesla's Earnings Report

In the US earnings season, with listed companies releasing their quarterly earnings one after another, all eyes are on the tech giants whose performance may have a significant impact on their own share prices and the entire US stock market.

On October 23rd, after the market closes, $Tesla (TSLA.US)$ will release its latest financial report. Each time a company releases its financial report, it may present a potential trading or investment opportunity. But before diving in, investors need to understand how to interpret their financial statements.

What should we consider when reading Tesla's earnings report? How will it affect the stock price movement?

1. Change in Deliveries

For Electric Vehicle (EV) makers, total deliveries or sales may be the most crucial indicator to monitor for several reasons.

Firstly, higher deliveries lead to larger market share and brand impact.

Second, sales boosts revenue. Tesla's stellar earnings growth historically was driven by increases in sales.

Thirdly, higher sales offer better economies of scale, leading to higher profit margins. While the effects of economies of scale were significant during Tesla's early development, now its impact on margin is limited.

So this crucial indicator may move Tesla's share price.

Typically, EV makers release their delivery figures every month, providing insights into sales trends ahead of earnings releases. Check out the Financials tab on moomoo to keep up with Tesla's quarterly deliveries.

As we can see, in Q1 2022, Tesla's quarterly vehicle deliveries growth slowed almost to zero, and in Q2 2022, this indicator experienced its first-ever decline. Its stock price began plummeting in the first quarter of that year.

However, $Tesla (TSLA.US)$ reported a better-than-expected delivery figure in Q2 2023, and its stock price rallied correspondingly.

Why did Tesla's deliveries fluctuate? It might have a lot to do with its pricing strategy. Before Q4 2021, the EV giant's deliveries surged thanks to its price cuts on all its models and booming demand.

Since Q4 2021, $Tesla (TSLA.US)$ has been hiking prices due to reasons including rising battery costs, pushing revenue per vehicle from $50,700 to $55,700. This strategy pressured sales volumes, eventually leading to a decrease in units sold.

In Q3 2022, $Tesla (TSLA.US)$ cut prices to boost sales, resulting in a drop in revenue per vehicle but an unexpected sales surge. This partly pushed the stock price up from $100 to over $280.

However, in Q1 2024, sales fell below 400,000 units for the first time since Q4 2022, leading to a significant drop in stock price. Fortunately, in Q2 and Q3 of 2024, Tesla introduced interest-free incentives, which helped sales rebound to 463,000 units in Q3, and the stock price began to recover.

2. Change in Profitability

Sales are crucial for Electric Vehicle (EV) makers as they directly affect revenue. However, profitability is the key factor that investors look at when evaluating these companies.

For example, Li Auto is the first among the earliest listed Chinese EV-makers to turn profitable, while NIO and XPeng still struggle financially. This may partly explain why Li Auto shares performed better compared to the others.

How about $Tesla (TSLA.US)$ ? In Tesla's case, its profitability is closely tied to total deliveries and pricing. The company's gross and net margins rose rapidly when its sales surged.

According to Tesla's financial statements on moomoo, from Q1 2019 to Q1 2022, its gross margin rose from 12.5% to almost 30%, with the net margin up from -14.7% to 17.5%.

While $Tesla (TSLA.US)$ lowered its vehicle prices during this period, the lower battery cost and economies of scale drove profits up.

However, after its deliveries reach a certain scale, Tesla's profitability becomes more dependent on changes in pricing strategy and production costs.

In 2023, Tesla's aggressive price cuts led to a steep decline in profitability. Gross margins, once over 25% in 2022, dipped to approximately 17.4% by Q1 2024, with net profit margins also falling from above 15% to about 5.4% in Q1 2024.

By Q2 2024, Tesla's profitability showed signs of recovery, with gross margins rising to around 18% and net margins bouncing back to approximately 5.9%. As we approach the Q3 earnings report for the 2024 fiscal year, the profitability figures may be important for investors. If Tesla can sustain this upward trend, it may positively impact the stock price. However, if profitability declines again after a brief rebound, the stock may continue to face pressure.

3. Actual Results VS Market Expectations

We should also take into account whether Tesla's actual results meet market expectations. Analysts estimate the earnings of high-profile companies like Tesla. You can find analysts' estimates of Tesla on moomoo.

When reading Tesla's earnings report, we should compare the actual revenue and EPS to analyst estimates.

Revenue estimates are generally more accurate because most of Tesla's revenue comes from selling cars and Tesla releases its quarterly car deliveries ahead of earnings release.

While revenue estimates are generally more accurate due to the predictable nature of Tesla's car sales, EPS may vary considerably from expectations. A higher-than-expected EPS may boost the short-term stock price, while missing expectations might cause it to decline.

Tesla's actual EPS for Q2 2024 came in at $0.42, falling short of the analysts' expectations of $0.484, which impacts short-term stock performance. For the upcoming financial report, we should continue to monitor how the actual EPS compares with the expected figures.

4. New product expectations

Despite facing pressures from slowing sales growth and declining profitability, Tesla's market capitalization remains over $500 billion, maintaining its position as the most valuable car company globally, with a price-to-earnings ratio exceeding 50.

From the perspective of the electric vehicle manufacturing industry, it may be challenging for $Tesla (TSLA.US)$ to justify such a high valuation. Much of the market's willingness to accept this premium likely stems from Tesla's potential in AI development, particularly regarding two significant upcoming products.

The first is the long-developed autonomous taxi, named CyberCab. The driverless market presents a substantial opportunity and significant growth potential for Tesla.

During the recent "Robotaxi Day," Musk announced that CyberCab is slated for production in 2026, with large-scale manufacturing expected in 2027. The vehicle's cost is projected to be under $30,000, and operating costs could drop to $0.20 per mile.

However, this timeline may fall short of market expectations, and Musk did not disclose specific technical details to highlight the company's competitive edge, leading many investors to question the product's viability. This skepticism partly contributed to a sharp decline in Tesla's stock price following the announcement.

The second product is the humanoid robot, Optimus. $Tesla (TSLA.US)$ has been working on this project for several years and has developed leading technology in this field.

Musk's expectations for Optimus include: a price tag below $20,000 and sufficient intelligence to replace some human workers. The potential market for a low-cost, practical humanoid robot is considerable.

However, like CyberCab, the timeline for Optimus's production has been repeatedly pushed back, with the earliest mass production now set for 2027.

In the upcoming quarters, we may closely monitor the progress of Tesla's Robotaxi and Optimus in terms of technological advancements and production timelines. If Tesla can surpass market expectations in these areas, it may help sustain Tesla's high valuation. Conversely, continued delays or failures in launching these products could place significant pressure on its valuation.

Having read this far, you may now have a deeper understanding of how to interpret Tesla's financial reports. It's noteworthy that the release of earnings reports from prominent companies may present unique trading opportunities for different types of investors.

For instance, if an investor, after analyzing past reports and considering recent developments, believes a company's latest earnings will send positive signals and boost the short-term stock price, they might consider taking a long position. This could involve buying the underlying stock or purchasing call options.

Conversely, if the investor expects the earnings to be unfavorable and potentially pressure the stock price, they might consider taking a short position, either through short selling or buying put options.

If the report's outcome is unclear but volatility is expected, they might use a straddle strategy, buying both calls and puts.

However, investors should carefully assess their risk tolerance, particularly when considering high-risk trades like short selling or options, before making any trading decisions.

Summary

Various critical metrics in Tesla's earnings may impact its stock prices. These include changes in deliveries that measure competitiveness, shifts in pricing strategy and profitability changes that ensure long-term healthy growth, and comparing the company's actual performance against market expectations, which may affect the stock price and market sentiment in the short term.

In summary, when analyzing Tesla's performance and its impact on stock price, we may closely monitor monthly sales figures, as they are the foundation of the company's competitive position in the industry.

Additionally, it's important to assess whether Tesla's profitability can improve in future results; continued weakness in profitability could exert lasting pressure on its stock price.

We may also compare Tesla's future performance with market expectations—consistent underperformance could significantly impact short-term stock prices and undermine long-term market confidence.

Finally, we may need to pay special attention to technological advancements and production timelines for Tesla's autonomous taxi and humanoid robot, as these developments are key to supporting Tesla's long-term valuation.

Remember that all indicators should be considered together, and other factors should also be taken into account when analyzing the earnings report.