Tesla's High-Stakes Q3 Earnings Report: Will Margin Erosion Trigger Stock Selloff? 2 Analysts Weigh In

Tesla, Inc. TSLA is gearing up to reveal its third-quarter financial performance, and analysts are bracing for the report and subsequent earnings call.

Scheduled for release next week, on Oct. 18, Tesla’s results come amidst a backdrop of price reductions and sluggish vehicle sales. Here’s what two analysts anticipate for the forthcoming report:

Will Musk Blame Economic Woes? Tesla’s stock has faced a downward trend following earnings releases over recent quarters, with declines occurring in seven of the past 12 quarters, according to Future Fund Managing Director Gary Black. He attributed this to concerns surrounding earnings quality and negative management commentary during conference calls.

Earnings quality concerns include factors like regulatory credits, non-operating income, or low tax rates.

The consensus estimate for Tesla’s earnings per share stands at $0.75, a decrease from the initial estimate of $0.78 before third-quarter deliveries were disclosed. According to Black, the most crucial metric this quarter is the auto gross margin, excluding regulatory credits. While the Street estimate pegs this figure at 18%, Black’s projection is 17.1%.

In the past two earnings calls, CEO Elon Musk and his team alarmed investors by suggesting the possibility of lowering auto gross margins to zero, offset by revenue from fully driving subscriptions. Additionally, they indicated that third-quarter volume might dip sequentially due to factory upgrades.

A key question this time is what management will communicate during the conference call regarding whether auto gross margins in the fourth quarter will drop below those of the previous quarter. Black said that investors are generally not receptive when management attributes weak results to the economy, especially when the economic climate remains robust. 

“That could certainly happen with Elon on the 3Q call,” he added.

See Also: Everything You Need To Know About Tesla Stock

Margin Inflection Coming? Gene Munster, of Deepwater Asset Management, underscored auto gross margins, excluding regulatory credits, as the most critical metric in Tesla’s earnings report. 

This metric has seen a decline over the past three quarters, largely due to price cuts announced in the first half of the year. Starting from 24.3% in December 2022, it reached 18.1% in June 2023, he said.

The 11.5% price reduction, accounting for vehicle mix, resulted in a roughly 26% decrease in gross profit, according to Munster, who expects this metric to fall within the range of 17.5% to 17.8%. 

He predicts that the initial market reaction may be negative based on the report but could turn positive during the call, particularly due to commentary on December’s gross margins.

Tesla’s management is likely to convey on the earnings call that margins will experience a slight improvement in the December quarter, aligning with the current consensus of 18.4%, Munster said. 

This expectation is based on the assumption that Tesla will meet its 2023 delivery target of 1.8 million units, with 475,000 units produced in the December quarter. Munster anticipates increased demand, driven by the Model 3’s Highland uptake and fewer than 5,000 Cybertruck deliveries.

Medium-term considerations revolve around Cybertruck production rates, as reservations remain high at approximately 2 million. Munster estimates that if one million of these reservations convert into firm orders over the next three years, Tesla may need to manufacture 330,000 trucks annually— an ambitious goal. He foresees Cybertruck deliveries expanding threefold to 15,000 units in the first quarter.

Tesla closed Tuesday’s session with a 1.52% gain, reaching $263.62, according to data from Benzinga Pro.

Check out more of Benzinga’s Future Of Mobility coverage by following this link.

Read Next: Dan Niles Expects ‘Beat And Raise Quarters’ From Nvidia, Google, But He’s Short Apple, Tesla: Here’s Why