Investors are looking to Tesla's Q3 earnings report, with concerns over operating margins and the impact of price cuts on revenue. Investors will be paying pay close attention to gross-profit margins amid falling prices for Tesla's electric vehicles.
Tesla, Inc. is set to report third-quarter earnings post-market on October 18, 2023. The company's recently disclosed Q3 delivery figures disappointed some investors. Analysts expect Tesla’s revenues to come in at $24.420 billion. Adjusted earnings are likely to come in at about $0.748 per share, according to Bloomberg's unanimous expectations.
Previous quarter review
Tesla Inc.’s profitability shrank in the second quarter. The Elon Musk-led company reported gross margin of 18.2% in the quarter, below the 18.8% Wall Street had expected. Still, Tesla beat earnings and revenue expectations. Its profit, excluding some items, came to 91 cents a share, more than the 81 cents analysts estimated.
Tesla delivered a record 466,140 cars in the period, spurred on by the price reductions that began earlier this year. Revenue rose 47% to $24.9 billion. Analysts had expected the company to generate $24.5 billion in sales.
What will we focus on in Q3?
Tesla misses Q3 delivery but maintains full-year guidance
Tesla has already reported delivery numbers for Q3 2023. For the quarter, Tesla reported 435,059 deliveries, and production of 430,488 vehicles. Wall Street was expecting Tesla deliveries to reach 461,640 for the period ending Sept. 30, according to a consensus of analysts polled by StreetAccount.
Analysts noted that the deliveries miss was tied to longer than expected downtimes of factories in Shanghai and Austin. Wedbush Securities analyst Dan Ives said the downtimes were likely to have led to ~20k units shift into Q4. "With price cuts mostly in the rear view mirror providing stability in prices going forward, we believe Tesla is now set to be entering the next stage of growth for the company globally with the Model 3 refresh front and center in China and Cybertruck production set to kick off beginning around Halloween," he noted. Crucially, Tesla remains committed to the target of 1.8 million deliveries for the year.
Price cuts may affect gross-profit margins
Investors will be paying pay close attention to gross-profit margins amid falling prices for Tesla's electric vehicles.
As for gross-profit margins, Tesla is expected to produce automotive gross-profit margins, excluding regulatory credits, of just below 18% in the third quarter, down a little compared with the second quarter. Automotive gross-profit margins peaked at about 30% in the first quarter of 2022.
A number at or around 17% would likely alarm investors. Wells Fargo analyst Colin Langan expects margins of about 16% due to falling prices and weaker deliveries.
Cybertruck fails to arrive in Q3
Tesla did not launch sales of the Cybertruck model in Q3 after Elon Musk had suggested earlier in the year that a delivery event was likely to occur during the quarter.
Musk, who has claimed the stainless steel exterior is “bulletproof,” is expected to update investors on the production of Tesla’s first pickup on an Oct. 18 conference call after the company reports its latest earnings.
The complexity of the model is believed to be behind the long road to customer deliveries.
Elon Musk stated that due to the nature of Cybertruck being made of bright metal with mostly straight edges, any dimensional variation shows up like a sore thumb. He noted that all parts for Cybertruck, including from suppliers, need to be designed and built to sub 10 micron accuracy. "
However, preproduction versions of the Cybertruck have been spotted in places including San Francisco, stoking excitement among Tesla fans about the truck's eventual release.
Tesla’s AI mojo dojo & FSD system
Tesla Inc. is sparing no expense to become a player in supercomputing. During Q2 conference call, Elon Musk said the electric carmaker plans to invest more than $1 billion on its so-called Project Dojo by the end of 2024. The investment is split between R&D and capital expenditures — and is in line with a previously-stated three-year expense outlook.
Dojo is designed to train Tesla's full-self-driving (FSD) system, which relies on real-world video data to improve autonomous driving capabilities. It addresses the need for increased compute power to process vast amounts of data from Tesla's growing vehicle fleet.
Musk said Tesla has a “staggering amount” of video at its disposal, thanks to its customers’ use of camera-based driver assistance software called Autopilot and a related feature known as “Full Self Driving Beta” that has racked up more than 300 million miles of data. The company said in its latest earnings release that it had begun production of its “Dojo training computer.”
Analyst opinion
Tesla price target raised to $400 at Morgan Stanley
Morgan Stanley believes Dojo could add up to $500 billion in enterprise value for Tesla by accelerating robotaxi adoption and software subscriptions. Their updated bull case scenario models TSLA stock reaching $550.
The dramatic upgrade follows Jonas’ 40-page deep dive report on Tesla’s AI and supercomputing capabilities. He highlights that Tesla’s Dojo team has over 250 years of combined hardware and software expertise.
Dojo’s purpose-built AI training power may enable breakthroughs in full self-driving, humanoid robots like Optimus, and other ambitious innovation pursuits. Morgan Stanley’s positivity signals Wall Street is beginning to appreciate Tesla’s potential beyond automotive.
Morgan Stanley's Adam Jonas foresees car, smartphone convergence
Jonas believes it’s not too early for Tesla investors to consider the implications of the blurring lines between the two market segments of automobiles and mobile devices.
The vehicle is now increasingly defined by its software and the key attributes of the connected vehicle include the primary hardware of a smartphone be it battery, screen, camera, modem, antenna etc. This primary hardware is then wrapped with additional features such as electric motors, crash safety systems, etc., Jonas said.
With Chinese automaker Nio recently launching a smartphone designed for specific use with its EVs and Tesla users increasingly using their phones as their primary key, this merging of the two segments is getting more absolute, he added.
JPMorgan reiterated a “sell” rating and a price target of $135
Ryan Brickman of JPMorgan reiterated a “sell” rating and a price target of $135. While that’s an improvement over his recent per-share forecast of $120, it still represents a downside potential of more than 45%. Goldman Sachs’ Mark Delaney lowered his price target to $252 and rated the stock as a “hold.”
William Stein of Truist Financial, who lowered his own TSLA stock price target to $243, also maintains a “hold” rating. An even harsher take came from Toni Sacconaghi of Bernstein two days ago, who maintained a “sell” rating and a price target of $150.
“Sacconaghi also expressed concern over Tesla’s auto gross margins, expecting potential downside due to lower volumes and significant discounts on cars sold from inventory. He also perceived weakness in the demand and a lack of new high-volume offerings, predicting that Tesla would need to cut prices further next year to drive volumes, which would impact margins.”
Sacconaghi believes that Tesla will need to demonstrate a strong Q4 and may require further price cuts to achieve its FY 23 delivery forecast. Meeting that goal would set the company up nicely to enter 2024, though the forecast has been adjusted. However, the recent deliveries miss doesn’t suggest that Tesla is making the type of progress that Wall Street wants to see. Price targets are being lowered ahead of earnings for a reason.
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