Three red flags to watch out for when Tesla reports quarterly earnings on Wednesday

Following the disappointment of its robotaxi unveiling on Oct. 10, Tesla needs to convince the market that its financials have bottomed ahead of an urgently needed launch of new models slated for the first half of next year.

As such, investors will be focused on three main clues to gauge whether the stock will continue to struggle or whether it could break out of its current sideways trend and mark fresh 2024 highs.

Margins

Until Tesla can provide a detailed road map that credibly explains not just when its AI is good enough to launch unsupervised full self-driving (FSD) but how, analysts will continue to take their cues from the core automotive business that accounts for the lion’s share of revenue and earnings.

The metric investors ought to focus on is its auto gross margin excluding regulatory credits. Any material improvement or deterioration will prove key for sentiment so long as it cannot provide evidence backing up its claim for rolling out unsupervised FSD in California and Texas next year.

And when it comes to profitability, the picture has been grim, with margins tracking steadily lower for the past two years.

Tesla's automotive gross margin, excluding regulatory credits, has dropped to just 14.6%, which is less than half of its peak of 30% in early 2022. Interestingly, Elon bought Twitter later that year, but it's unclear if this decline is related to that. Pic.twitter.com/7I9902URzU

— Troy Teslike (@TroyTeslike) July 23, 2024

Analysts expect the stock over the next few months to struggle if it turns out that the second quarter figure of 14.6% did not form the bottom.

“The Street will be laser-focused on 3Q showing a margin/demand inflection point in the Tesla story heading into 2025,” wrote Wedbush Securities analyst Dan Ives on Monday, adding he expects gross margins should finally start to rebound with this week’s report due to show “a much-needed step forward.”

While Cybertruck profitability should improve as production scales, the volume remains, however, negligible. Demand in the third quarter depended heavily on less lucrative sales of lower-spec entry vehicles in China achieved with the help of 0% teaser financing rates that should erode margins.

Outlook

Tesla has made two firm commitments to shareholders for the immediate future.

Number one is a pledge to grow volumes this year and top the 1.8 million vehicle sales in 2023. This implies a blowout fourth quarter with 514,000 cars delivered to customers in the final three months of this year, an increase of 6% over the previous best-ever record from Q4 of 2023.

With demand in Europe soft and U.S. Sales growing in the past quarter at a single-digit percentage rate thanks mainly to the Cybertruck, that growth could prove difficult.

Lastly, many analysts and investors had hoped to see at least one of the new models slated to launch in the first half of next year at the disappointing robotaxi event, which was heavy on theatrics and light on specifics.

The market instead received no new evidence that Tesla is preparing to launch new product in early 2025 beyond an expected facelift of the Model Y, known as “Juniper.” Most analysts expect the business to remain rocky until an all-new entry vehicle, often called the Model 2, finally hits markets.

Any revision of these two targets will likely hurt the stock, which is currently trading at 72 times consensus earnings per share for next year. That’s a steep valuation for a growth company that’s no longer growing. At its current trajectory, Tesla isn’t expected to top its 2022 record profit until 2026 at the earliest.

“If gross margin falls [quarter on quarter], then we think the valuation could continue contracting for several months, until Tesla discloses details regarding ‘Model 2,’” wrote analyst Alex Potter from Piper Sandler on Monday.  “Near-term trading sentiment often relies on this metric whenever ‘outside the box’ revenue streams (e.g., robotaxis) seem like distant possibilities.”

Investor Q&A wild card

There is one variable no one can predict with any certainty: Musk’s mood during the call and his willingness to answer questions with clear, straightforward answers that address the question at hand.

One of these questions could very well be on the potential damage to the brand from his vigorous and outspoken campaigning for Donald Trump. Asked at a recent election event whether his full-throated support of the former president is hurting sales among his largely progressive customers, Musk was unsurprisingly dismissive.

“Tesla sales are actually doing great, we’re hitting all-time highs,” he claimed, without being more specific. 

Is Elon Musk hurting Tesla’s brand by his political action? Elon Musk answers this question from Yaman Tasdivar (aka ValueAnalyst1) pic.twitter.com/RmqHpYQjWv

— Bradford Ferguson (@bradsferguson) October 19, 2024

Tesla’s group revenue did hit a record $25.5 billion in the second quarter thanks in part to its Megapack energy storage business.