The mood on Wall Street swung definitively behind Tesla on Tuesday, a day before the publication of third-quarter earnings.
News late on Monday that the figures would come a week earlier than expected contributed to a 12 per cent share price rise. The last time Tesla reported early, two years ago, was also the last time it squeezed out a profit, before further major investment in production of its all-important mass-market electric car, the Model 3.
If chief executive Elon Musk felt in need of vindication after his recent battles with regulators and stock market critics, he could also draw inspiration from Monday's about-turn by Citron Research, once an outspoken short seller. Citron said it now held a long position in Tesla and that many "warning signs" about the company "have proven not to be significant". The company, it added, was "destroying the competition".
But if the third-quarter numbers are expected to bring some respite after the relentless criticism Mr Musk has faced this year, investors will be on the lookout for signs of what comes next. By early 2019, investment spending is expected to start rising sharply again, profit margins on the Model 3 face greater challenges, and competition in electric cars is forecast to pick up.
1. Will Tesla turn a profit?
Mr Musk has promised to deliver a profit in the second half of this year. The Wall Street consensus still sees a loss of 19 cents a share in the third quarter, but all the signs have been pointing towards a positive surprise. In an email to staff a day before the end of the quarter, Mr Musk said the company was close to profitability - “an epic victory beyond all expectations”.
Tesla has already said it hit its target production rate of 5,000 Model 3s a week at the end of the quarter, and that it delivered 55,840 of them in the period. Analysts expect revenues of $6.3 billion, up from $2.99 billion (€2.6 billion) a year ago.
With volume picking up, Tesla has forecast a 15 per cent gross profit margin on the Model 3 for the third quarter, lifting the company’s overall automotive margin back into the mid-20s, from around 21 per cent last quarter.
The move into profit is expected to be more lasting than two years ago and could have analysts racing to upgrade their earnings forecasts for the final months of the year. Tesla has promised that margins on the Model 3 will be supported when it starts selling the cars in Europe and Asia, and a timetable for moving into those markets would add to confidence.
Analysts are also expecting Tesla to move into positive free cash flow, at least temporarily. The company has already said it plans to hold down capital spending for the rest of this year, and its cash flow should get a lift from lower working capital as the Model 3 production rate increases.
2. Can Tesla rebuild its finances?
The stronger cash flow should reduce the recent strain on Tesla’s finances, though most analysts still think improvements in the second half will not be enough to settle worries.
Tesla’s cash had fallen to $2.2 billion at the end of June, or $1.3 billion excluding customer deposits, down $1.1 billion since the start of the year. The cash position is expected to rise back above $3 billion by the end of the year, though most of that recovery is expected in the fourth quarter.
Investors will be listening carefully for any hint that Mr Musk is willing to change course and return to the capital markets. Even after Tuesday’s 12 per cent share price rise, Tesla’s stock price is still 18 per cent below the conversion price of a $920 million convertible bond issue that matures next March, suggesting it may need to repay those securities. But if Tesla has a good quarter and looks like it could be on its way to achieving financial sustainability, it is unlikely Mr Musk will have a change of heart.
3. Will Model 3 prices have to fall to maintain demand?
The expected jump in gross profit margins partly reflects the fact that Tesla has so far only sold top-of-the-range Model 3s, with prices starting at $49,000. But last week it dropped the price floor by $4,000 with a new “mid-range” battery option, prompting speculation that demand for the most expensive vehicles may already be reaching saturation.
Mr Musk is likely to face questions on Wednesday about how quickly he expects to move to cheaper vehicles, and what that will do to profit margins. The phasing out of the company’s $7,000-a-vehicle federal tax credit in the US has also raised worries about the outlook for demand.
4. When will Tesla’s next investment binge begin?
The focus on the Model 3 has distracted attention from a subject normally uppermost in the minds of Tesla investors: where will the next round of growth come from? This is likely to feature more in analysts’ questions this quarter, as they look to next year and beyond - and the next round of heavy spending.
Mr Musk put off his deadline for doubling production of the Model 3 to 10,000 a week. But he is likely to be under pressure to be more specific now Tesla has passed its interim targets, particularly when it comes to moving ahead with a Shanghai automotive plant and an eventual facility in Europe.
Investors will also be hoping for confirmation that Tesla will unveil its next vehicle, the Model Y, early next year, with a launch set for 2020.
5. The Musk factor
Mr Musk's demeanour has become a serious concern for many investors. After berating analysts on an earnings call in April, he was apologetic the next time he spoke to Wall Street. But that was before his notorious "funding secured" tweet, which led to sanctions from the Securities and Exchange Commission - a body he later risked antagonising by describing it as the Shortseller Enrichment Commission.
Will the earnings call reveal a chastened chief executive? Or will Citron Research’s about-turn and a stronger quarterly performance bring out a more combative Mr Musk - and make CEO risk a more immediate worry for investors? – Copyright The Financial Times Limited 2018
