Tesla: Continue To See Further Downside Risk Ahead

Post deliveries we pointed out that we thought there was risk for earnings for Tesla TSLA on April 4th.

We said then, "There's a good shot that the average price drop can surprise the Street to the downside and a drop in costs may not be enough to save margins."

That was certainly the main story last night for earnings.

I wanted to share some of the chat reactions I had for subscribers immediately following the earnings print. Our work helped subscribers save a lot of time, money and negative energy ahead of the report but we also helped subscribers avoid further breakdown of the stock, of which I think there's more to come.

Above are some of the chat posts I posted to subscribers as soon as Telsa printed its earnings. A key part to what I do is react quickly to earnings on stocks we follow especially when the news prints on the tape.

In fact Tesla did soon break that key level 176 I pointed out and then did go into free fall.

Based on my numbers I don't think Tesla's done dropping.

I'll share with you what we said to subscribers last night in a report,

"Breaking 175 is short term technical risk for lower. Fundamentally there's further risk.

This was not a good quarter. I previewed that pricing was a risk to margins. The main metric is auto gross margins which account(ed) for 90% of the overall profit. 30 years ago my boss instilled in me a simple concept to understand the major drivers of a company's revenues and profits. So 90% of a company's profits slowing is a problem. There is no other way to look at it.

The energy business had strong revenues and the company said on the call that they expect higher margins but this quarter margins dropped a touch and this business, so far is not the auto business. Margins were a fraction of auto.

I look at things in the tradable discountable timeframe of 9-12 months. I believe valuations are most affected by that time period which means the next 12 months' earnings are, to me, the main driver to stock prices. That's helped us be big bulls on the way up for TSLA and stepping aside near the peak a year-plus ago.

I said in past notes that our EPS has now been below the Street and after this call with auto margins dropping big, our EPS drop further more meaningfully below the Street.

Musk expected full autonomy on this call coming this year, but until we see it I can't model the benefits. When we see it I'll be happy to model it benefitting that tradable discountable market pricing model window.

In the meantime Musk basically said that price cuts were demand driven more than cost driven which was a change from their analyst day. I did point out that analyst day there appeared to me a NEED to drop costs. Musk's complaining about the Fed and rates means that if they didn't cut prices orders probably could have been LESS than production.

Musk on the call saying that they can sell cars for zero profits with autonomy on-the-come does not help his valuation case given autonomy's been pushed out many times.

For anybody that's been in the business a while and has followed more than just TSLA, they know that these are not good things to hear and feed into earnings models and so valuations, negatively.

I see more risk coming."

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