Tesla Faces Challenges Ahead of Q3 Earnings Report
Tesla (TSLA) has struggled in recent weeks, mainly due to disappointing production results and mixed reactions after its much-anticipated Robotaxi event. As the company gets ready to announce its Q3 earnings next week, I recommend maintaining a Hold position on TSLA.
My cautious approach is based on the belief that, as investors focus more on actual profits, the company’s profit margins may be squeezed in Q3. This is a response to persistent challenges in the auto industry. While surprises could still come from regulatory credits or solid growth in its energy storage segment, overall, the outlook remains uncertain.
Q3 Deliveries Fall Short of Expectations
Tesla will report its Q3 earnings on October 23. It’s essential to note that Tesla typically shares production and delivery figures before its earnings announcement, which often leads to less impactful earnings days.
Earlier this month, Tesla reported 462,890 deliveries for Q3, marking a 6% increase from the same time last year but falling short of analysts’ expectations of 463,310. This gap reflects a trend investors may have started to anticipate.
Several macroeconomic factors have played a role in these results, particularly the high interest rates that have made financing less accessible for consumers. This has impacted auto sales, a trend seen across the industry. Major automakers like Ford (F), General Motors (GM), and Stellantis (STLA) also reported weak sales.
Furthermore, Tesla’s shift toward autonomous ride-hailing and developing humanoid robots might be affecting its production capacity. Such a major strategic change may lead to a temporary decline in traditional electric vehicle deliveries and production numbers.
Anticipation Surrounds Robotaxi
While the current landscape for Tesla is cautious, the company appears to have significant potential in its AI initiatives, especially with its focus on autonomous ride-hailing and humanoid robotics. The much-anticipated Robotaxi event finally occurred on October 10 after multiple delays.
Despite the excitement, the market’s response was mixed. During the event, Elon Musk announced plans to produce Cybercabs before 2027 but acknowledged a tendency for overly optimistic timelines. He also claimed that the two-seater Cybercab could be sold for under $30,000; however, this raised doubts about the feasibility of such commitments within the projected timeframe.
Event Reflection
Despite these concerns, I consider the Robotaxi event a success, driven more by the year’s buildup than the actual event’s details. The hype around Robotaxi helped boost Tesla’s share price from around $140 earlier this year to over $260, even as the company reported subpar sales and production results.
Interestingly, Tesla has cautioned investors about slowing growth this year, stepping away from its previous goal of a 50% compounded annual growth rate (CAGR). Instead, Musk appears to be shifting the conversation towards the Robotaxi project, advancements in robotics, and other technological efforts, diverting attention from electric vehicle sales alone.
Looking Ahead to Earnings Day
Despite a drop of more than 8% in Tesla shares since the Robotaxi announcement and the market already accounting for its delivery numbers, I maintain a neutral view ahead of the Q3 earnings report. Investors should increasingly prioritize Tesla’s profitability rather than just its delivery figures.
It is critical for Tesla to maintain vehicle sales to support its Full Self-Driving (FSD) program and broader ecosystem. However, gross profit appears to be a crucial metric to follow. Although regulatory credits might offer some help—showing surprising strength last quarter—there are concerns surrounding possible margin compression due to competitive pricing pressures. Notably, Gordon Johnson, an analyst at GLJ Research, predicts a decline in Tesla’s gross margin to 15%, down from 18% reported in Q2.
Potential for Positive News
Amid the concerns regarding margins, there are areas that might yield positive surprises. The energy storage segment has gained traction, with Tesla deploying 6.9 GWh in Q3, a significant 72.5% increase from 4 GWh in Q3 2023. This growth is essential as the company navigates its strategic transformation.
During the earnings call, any insights from Musk regarding financing and scaling plans for Robotaxi and Optimus could also positively influence the stock, even if prior earnings expectations aren’t surpassed. Wall Street looks for Tesla to report a Q3 EPS of $0.60, a 9% decrease year-over-year, and revenues of $25.67 billion, a 10% increase year-over-year.
Wall Street Consensus on TSLA
According to TipRanks, the consensus rating for Tesla remains at Hold. Of 35 analysts, 11 recommend buying, 16 suggest holding, and eight advise selling. The average price target sits at $207.83, indicating a potential downside of about 5.63%.
Explore further TSLA analyst ratings
Conclusion
The market has reacted negatively to Tesla’s recent production figures and the Robotaxi event. While the weak Q3 delivery numbers were somewhat expected, the uncertainty surrounding financing and scaling of Robotaxi production remains troubling. This could be a strategic move by Tesla to shift focus from its declining electric vehicle sales.
Looking ahead, I expect Tesla’s Q3 results to reflect ongoing challenges, with little hope for an improvement in profit margins—an area that should be of increasing concern to investors. For these reasons, I choose to remain on the sidelines as earnings day approaches.
Disclosure
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
