Can Tesla’s earnings keep the throttle open on its share price?

It’s been a red-hot winter for Tesla’s [TSLA] share price, with its stock soaring from $244 in early October to $564 at close on Friday (24 January), powering its market cap to over $101bn. That is more than the value of General Motors [GM] and Ford [F] combined.

Tesla’s share price was boosted by a surprise third-quarter profit, the opening of its Shanghai Gigafactory in China (accompanied by founder Elon Musk doing a bizarre Egyptian dance routine), as well as better than expected fourth-quarter delivery numbers, which it posted in early January.

The trading update estimated that it had delivered a record 112,000 units in the last three months of 2019, taking its total for the year to 367,500 vehicles, up 50% from 2018.

Despite fears from earlier in 2019 that Tesla was running out of gas due to faltering demand, especially in China, confidence in the share price has been renewed recently.

With the company due to report on Wednesday (29 January), will its fourth-quarter earnings keep up the momentum or will the naysayers take over behind the wheel?

Supercharged deliveries but sales on low power

While many analysts are positive ahead of Tesla’s earnings announcement based on the recent outperformance of its share price, there’s some headwinds that will need to be addressed. 

For instance, investors will be looking to see if consumer demand is still high, what impact its recent factory investment in China and Germany is having on its balance sheet and margins, and how it is dealing with rising competition in the US.

“Generally, we think the recent stock price run-up has greatly raised the bar in terms of expectations and elevated the risk of disappointment,” Garrett Nelson, an analyst at CFRA, told MarketWatch.

“Generally, we think the recent stock price run-up has greatly raised the bar in terms of expectations and elevated the risk of disappointment” - CFRA analyst Garrett Nelson

Tesla is expected to report GAAP earnings of $0.43 a share compared to $0.78 a share in the same period in 2018, according to analysts polled by FactSet. Adjusted profit is expected to be $1.65 a share, compared with $1.93 a share in 2018.

While sales are tipped to come in at $6.9bn for the quarter, down from $7.2bn a year ago, deliveries for the year are expected to reach a new record.

This mixed performance could disappoint investors who may also be wary any upcoming bumps in the road such as the expiration of electric vehicle credits in the US and the potential for a further reduction in subsidies for electric cars in China.

UBS adds that there may be some cannibalisation ahead for Tesla’s Model 3 by its upcoming Model Y. Analysts at the firm told MarketWatch that “incumbents are likely to re-gain EV market share”, which has led to about a 15% decline in Tesla’s share price.

Analysts remain bullish

“Much of the recent share rally has been due to short covering, which has created a coiled spring effect in the stock price,” Nelson told MarketWatch. “As Tesla short interest has come down from nearly 25% last June to less than 15%, the data suggests that a lot of the shorts have capitulated, so the spring is a lot less coiled now and we think there’s room for the shares to fall absent a blockbuster earnings release.”

Political activist Ralph Nader is also cautious. “Deep in debt, selling less than 400,000 vehicles last year and challenged by several competing electric car models in 2020, Tesla’s stock valuation stunningly exceeds VW which sold over 10 million vehicles last year,” he wrote in a recent tweet. Adding: “Watch out, Tesla believers.”

“Deep in debt, selling less than 400,000 vehicles last year and challenged by several competing electric car models in 2020, Tesla’s stock valuation stunningly exceeds VW which sold over 10 million vehicles last year” - Political activist Ralph Nader

However, UBS overall remains positive about the stock, suggesting that Tesla could become the “most profitable” US carmaker. “With a 2025 view, Tesla is well-positioned to make higher margins than incumbent premium OEMs ever did. However, margins and free cash flow will likely be under pressure around major product launches,” the analysts wrote in a note.

Wedbush analysts also remain confident. According to MarketWatch, they predict that Tesla could hit the 500,000 delivery mark this year and has potential to reach the “elusive and game-changing one million overall delivery vehicle mark in 2022” – two years ahead of its original predictions.

Tesla share price vitals, Yahoo Finance, 27 January 2020

Wedbush analyst Daniel Ives wrote in a note to clients that the Wedbush “believe Musk will not disappoint as underlying strength in China and Europe demand appear robust based on our analysis”. He added that the firm “believe the China opportunity is worth between $75 to $100 per share and remains the key fuel in the growth engine,” according to Investor’s Business Daily.

The mean consensus rating on the stock is a hold with an average target price of $391, according to data from MarketScreener. Some go even further with Ark Investment founder Catherine Wood telling CNBC that she sees shares hitting $6000 in the next five years.

Musk would certainly get his dancing shoes back on if that came to pass.