Tesla’s Q3 Earnings Shine Amidst Market Uncertainty
After a challenging year in 2023, Tesla (NASDAQ: TSLA) reported impressive earnings last week, leading to a substantial 22% surge in its stock on Thursday, marking its best single-day performance in years.
Strong Profits Offset Sales Growth Concerns
The boost in stock price followed a significant increase in operating income, which soared 54% to $2.7 billion. Notably, strong performance in Tesla’s energy generation and storage businesses, along with its services segment, contributed to these profits. The company also successfully lowered its cost of goods sold per vehicle to a record low of $35,100 following layoffs in the second quarter.
While profits have improved, CEO Elon Musk’s production forecast for next year has also sparked optimism, with predictions to ramp up production by 20% to 30% in 2025. The company plans to manufacture approximately 1.8 million vehicles, which translates to an increased output of 360,000 to 540,000 vehicles over the upcoming year. The introduction of the Cybercab, Tesla’s new autonomous vehicle, is expected to begin next year, with serious scaling anticipated by 2026.
Concerns Around EV Market Saturation
Despite the positive earnings, there are fears that the electric vehicle (EV) market is coming to a halt. Many EV companies, including Tesla itself, have reported limited growth recently. Even legacy automakers like General Motors and Ford Motor Company have lowered their EV expectations, citing high costs and diminished demand as factors.
Musk claims Tesla remains the only profitable EV manufacturer, as many others struggle with losses. Tesla provided a chart in its earnings presentation depicting the stagnation of EV growth, particularly outside of China, over the past four quarters. Various factors contribute to this lack of growth: higher EV prices, concerns over range, and a preference for the convenience of traditional gasoline vehicles. Interestingly, the rise in hybrid sales indicates that consumers appreciate electric efficiencies but may still favor the familiarity of hybrids.
Tesla believes there is room for EV expansion as they anticipate increasing market share from internal combustion engine (ICE) vehicles. Nonetheless, the transition may not follow a straightforward trajectory, particularly due to the cost disparities. Historical examples highlight this uncertainty—predictions of e-books replacing print books have not fully materialized.
Challenges Ahead for Tesla
The Cybercab is touted as a revolutionary vehicle since it operates without a steering wheel or pedals. However, achieving regulatory approval in key states like Texas and California remains a hurdle. Considering the typical regulatory process and challenges faced by other autonomous vehicle companies, it may take time for Tesla’s expectations to turn into reality. Furthermore, an incident could easily derail progress in Musk’s vision for autonomous vehicles.
Tesla needs to continue growing its core business while the EV market remains uncertain. Unlike traditional automakers with lower price-to-earnings ratios, Tesla’s stock trades at over 100 based on trailing adjusted earnings per share. To justify this valuation, a production surge next year or advancements with the Cybercab are crucial. Failing to meet these expectations could lead to another drop in stock value, reminiscent of its decline in early 2024.
Potential Opportunities Ahead
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Currently, three companies are highlighted for potential investment before opportunities slip away.
See 3 “Double Down” stocks »
*Stock Advisor returns as of October 28, 2024
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
