Market Await Q3 Earnings after Tesla Stock Rebounds from Lows

Tesla (NYSE: TSLA) stock soared yesterday amid the rally in wider US markets. Markets are now awaiting its Q3 2022 earnings which are scheduled for tomorrow.

Tesla stock is down almost half from its 52-week highs. There has been a sell-off in growth stocks which is putting pressure on TSLA also. The company’s upcoming earnings release would be an opportunity to address investor concerns.

Tesla set to report third-quarter earnings

Analysts expect Tesla to report revenues of $21.95 billion in the third quarter, a YoY rise of 59.6%. While Tesla also gets revenues from software and energy products, the automotive segment is its biggest revenue driver. In the third quarter, TSLA would benefit from high higher car prices as well as deliveries.

In the third quarter of 2022, Tesla delivered 343,830 cars, a new record. The deliveries were however below what Wall Street was expecting. In the previous quarter also, its deliveries were below expectations but it was due to the lockdowns in China.

TSLA missed third-quarter delivery estimates

Commenting on the delivery report, TSLA said, “As our production volumes continue to grow, it is becoming increasingly challenging to secure vehicle transportation capacity and at a reasonable cost during these peak logistics weeks.” It added, “In Q3, we began transitioning to a more even regional mix of vehicle builds each week, which led to an increase in cars in transit at the end of the quarter. These cars have been ordered and will be delivered to customers upon arrival at their destination.”

Analysts expect Tesla to post higher profits

Analysts expect Tesla to post an adjusted EPS of $1.01 in the third quarter, a YoY rise of 63%. Notably, Tesla has increased vehicle prices which are expected to lift its margins. At the same time, the production ramp-up at Austin and Berlin plants might drag down the earnings.

The company has raised FSD (full-self driving) price to $15,000, which is $5,000 higher than what it cost at the beginning of the year. Musk has previously said that software revenues almost entirely flow to its gross margins. Regulators meanwhile have not been too pleased with TSLA for using the term “full-self driving.”

The NHTSA (National Highway Traffic Safety Administration) has always been against the term “FSD. Earlier this year Ralph Nader called upon the agency to issue a recall of FSD. He said, “Tesla’s major deployment of so-called Full Self-Driving (FSD) technology is one of the most dangerous and irresponsible actions by a car company in decades.”

He added, “This nation should not allow this malfunctioning software which Tesla itself warns may do the “wrong thing at the worst time” on the same streets where children walk to school. Together we need to send an urgent message to the casualty-minded regulators that Americans must not be test dummies for a powerful, high-profile corporation and its celebrity CEO. No one is above the laws of manslaughter.”

Elon Musk on FSD

Here it is worth noting that the name FSD can be misleading as autonomous driving is not fully equipped yet and even Tesla advises car drivers to keep their hands on the steering all the time even if the car is in autonomous mode.

Inflation Reduction Act to Benefit Tesla

President Joe Biden signed the Inflation Reduction Act which would hasten EV adoption in the country. Tesla cars stopped qualifying for the federal EV tax credit as the company crossed the minimum threshold of sales. Now, even Tesla cars would be eligible for the subsidy from 2023. Analysts are bullish on Tesla after the passage of the Inflation Reduction Act.

Apart from Tesla, General Motors and Toyota Cars also did not qualify for the EV subsidies after crossing the threshold. So, the expansion of the EV tax credit to all Tesla cars is certainly a positive for the company especially as the company launches more models. It said that Semi deliveries would start from this year only while Cybertruck’s deliveries would begin from 2023.

EV competition is heating up

Ford has already taken the lead in the EV pickup industry and started delivering the all-electric version of its F-150 earlier this year only. Rivian also has a pickup model but it would be a battle royale between Cybertruck and F-150. While the former has an unconventional design and has boasted of strong pre orders, the latter’s ICE (Internal Combustion Engine) model has been North America’s best-selling pickup for decades.

What would markets watch in Tesla earnings call?

During Tesla’s earnings release, markets would watch for any update to the 2022 delivery guidance. Also, analysts would look for more color on Semi and Cybertruck production timelines as both the models are running behind schedule.

Tesla might offer insights into its pricing strategy. Previously, Musk said that the company would lower pricing when inflation drops. However, as its cars would be eligible for the EV tax credit from 2023, analysts expect the company to instead bump up its pricing.

Rising interest rates are a risk for Tesla

While Wells Fargo analyst Colin Langan believes that the Inflation Reduction Act is positive for Tesla, he lowered his target price from $280 to $230 citing higher interest rates. “While IRA will help in 2023, the economy and interest rates likely will not, particularly in Europe where an energy crisis looms,” said Langan.

He also said that buyers might postpone purchasing a Tesla car amid higher interest rates. Here it is worth noting that Tesla is a supply-constrained company and is able to sell all cars that it produces and does not carry massive inventories like other legacy automakers.

TSLA expected to post an earnings beat

Langan meanwhile believes that Tesla would report a slight earnings beat in the third quarter. He said that forex headwinds would offset strong pricing gains in the quarter.

The relentless rise in the US dollar has been a headwind for all US multinational companies. Among others, the Fed’s aggressive rate hikes are leading to a stronger US dollar.

All said, analysts would keenly await Tesla’s upcoming earnings as the Elon Musk-run company might provide insights into the EV demand environment amid worsening macro indicators.