Tesla earnings expected to drop sharply in Q1 as margins come under pressure – Stock Market News
April 13, 2023 11:27 am
Tesla Inc will report its first quarter earnings on Wednesday, April 19 after the market close amid slowing demand for the electric vehicle (EV) giant. With competition intensifying in the electric car market, Tesla has been forced to slash prices in recent months, hurting its enviably lofty margins. The Q1 earnings numbers should provide some indication as to whether or not this strategy is paying off. But investors will also want to hear about what new products are in the pipeline as the stock’s impressive rebound has started to look shaky.
Tesla stock shines in 2023
After a dismal 2022, Tesla’s share price is outperforming this year, not just the broader stock market but also the tech sector. This impressive rebound from the near 2½-year lows it brushed at the start of the year is surprising given all the concerns about a softening demand backdrop. Not only that, but the more than 75% drop from 2021’s all-time high did not go far enough in bringing down the company’s price-earnings multiple to levels that are more comparable with those of other tech firms.
Back in January, CEO Elon Musk struck an optimistic tone in the Q4 earnings call, suggesting that new orders are outstripping production. The stock shot higher on the back of those comments even though car deliveries missed estimates. However, all the signs since the last earnings point to ongoing weakness in demand. Most notably, only last week, the company cut the price of its cars in the United States for the fifth time this year.
Deliveries are up, but…
On the bright side, the lower prices do at least appear to be boosting sales. The company revealed on Sunday that it delivered a record 422,875 vehicles in the three months to March – up 36% from the same period a year ago. But this was nevertheless below the 430,000 figure most analysts were expecting and less than the 440,808 vehicles it produced during the period, meaning that supply still exceeded demand. Potentially making matters worse, Tesla’s popular Model 3 car will no longer qualify for the full tax credit of $7,500 in the US as of April 18.
Doubts about the demand outlook, which deteriorated even more after the banking crisis, have started to weigh on the share price recently and it remains to be seen whether the Q1 results will be able to revive the recovery. According to Refinitiv I/B/E/S estimates, the company is expected to report a 21.3% annual drop in earnings per share (EPS) to $0.85 in what would be the first year-on-year decline since 2020.
It’s a somewhat more positive picture on the revenue front. Analysts are forecasting revenue of $23.57 billion, which would represent yearly growth of 25.7%
Thinning margins are a drag on the stock
The stock is currently trading in the $190 region so an earnings beat would bring the $200 level into scope for the bulls, although a re-test of the February peak of $217.65 seems more challenging. On the flipside, any selloff could push the price down towards the March trough of $163.91. A break below it would open the way towards January’s low of $101.81.
Investors are likely to be most sensitive to any surprises in EPS as Tesla’s profit margins are under scrutiny after being squeezed from the series of price cuts. With so many other car manufacturers joining the EV race, the market is being flooded with cheaper electric alternatives.
Will there be any new insights on upcoming models?
Tesla will have to prove that it can continue to grow sales at the rapid pace it has done over the last few years either by slashing prices or by sustaining the brand’s appeal with newer and more innovative products. The company failed to announce any new models when it held an Investor Day on March 1.
An update on the timeline of its planned new vehicle range could rekindle some excitement about Tesla, while boasting about its increasing production capacity may be greeted with some reservation by shareholders amid worries about overproduction.
High valuation is still a concern
For long-term investors, a question mark is emerging of how much longer Tesla can continue to be considered a growth stock if this slowdown in earnings doesn’t turn out to be a temporary phase. Without astronomical earnings growth, it will be difficult to justify the bloated valuation.
Tesla’s trailing 12-month price-to-earnings (PE) ratio stood at 49.9 as of April 12, while the forward 12-month PE was only marginally lower at 42.1. In contrast, the S&P 500’s forward multiple is 18.1 and the Nasdaq Composite’s is 25.7. Nevertheless, a majority of analysts are still recommending the stock as a ‘buy’, with a median price target of $210.10, so the jury is by no means out about the stock’s attractiveness.
Going forward, while sentiment in the broader tech sector will be a key driver for the stock, investors will likely be paying more attention to the demand outlook for EV vehicles, particularly in Tesla’s home market in the US, and increasingly in China as well, which accounts for almost half of the company’s sales.
Tesla Inc will report its first quarter earnings on Wednesday, April 19 after the market close amid slowing demand for the electric vehicle (EV) giant. With competition intensifying in the electric car market, Tesla has been forced to slash prices in recent months, hurting its enviably lofty margins. The Q1 earnings numbers should provide some indication as to whether or not this strategy is paying off. But investors will also want to hear about what new products are in the pipeline as the stock’s impressive rebound has started to look shaky.
Tesla stock shines in 2023
After a dismal 2022, Tesla’s share price is outperforming this year, not just the broader stock market but also the tech sector. This impressive rebound from the near 2½-year lows it brushed at the start of the year is surprising given all the concerns about a softening demand backdrop. Not only that, but the more than 75% drop from 2021’s all-time high did not go far enough in bringing down the company’s price-earnings multiple to levels that are more comparable with those of other tech firms.
Back in January, CEO Elon Musk struck an optimistic tone in the Q4 earnings call, suggesting that new orders are outstripping production. The stock shot higher on the back of those comments even though car deliveries missed estimates. However, all the signs since the last earnings point to ongoing weakness in demand. Most notably, only last week, the company cut the price of its cars in the United States for the fifth time this year.
Deliveries are up, but…
On the bright side, the lower prices do at least appear to be boosting sales. The company revealed on Sunday that it delivered a record 422,875 vehicles in the three months to March – up 36% from the same period a year ago. But this was nevertheless below the 430,000 figure most analysts were expecting and less than the 440,808 vehicles it produced during the period, meaning that supply still exceeded demand. Potentially making matters worse, Tesla’s popular Model 3 car will no longer qualify for the full tax credit of $7,500 in the US as of April 18.
Doubts about the demand outlook, which deteriorated even more after the banking crisis, have started to weigh on the share price recently and it remains to be seen whether the Q1 results will be able to revive the recovery. According to Refinitiv I/B/E/S estimates, the company is expected to report a 21.3% annual drop in earnings per share (EPS) to $0.85 in what would be the first year-on-year decline since 2020.
It’s a somewhat more positive picture on the revenue front. Analysts are forecasting revenue of $23.57 billion, which would represent yearly growth of 25.7%
Thinning margins are a drag on the stock
The stock is currently trading in the $190 region so an earnings beat would bring the $200 level into scope for the bulls, although a re-test of the February peak of $217.65 seems more challenging. On the flipside, any selloff could push the price down towards the March trough of $163.91. A break below it would open the way towards January’s low of $101.81.
Investors are likely to be most sensitive to any surprises in EPS as Tesla’s profit margins are under scrutiny after being squeezed from the series of price cuts. With so many other car manufacturers joining the EV race, the market is being flooded with cheaper electric alternatives.
Will there be any new insights on upcoming models?
Tesla will have to prove that it can continue to grow sales at the rapid pace it has done over the last few years either by slashing prices or by sustaining the brand’s appeal with newer and more innovative products. The company failed to announce any new models when it held an Investor Day on March 1.
An update on the timeline of its planned new vehicle range could rekindle some excitement about Tesla, while boasting about its increasing production capacity may be greeted with some reservation by shareholders amid worries about overproduction.
High valuation is still a concern
For long-term investors, a question mark is emerging of how much longer Tesla can continue to be considered a growth stock if this slowdown in earnings doesn’t turn out to be a temporary phase. Without astronomical earnings growth, it will be difficult to justify the bloated valuation.
Tesla’s trailing 12-month price-to-earnings (PE) ratio stood at 49.9 as of April 12, while the forward 12-month PE was only marginally lower at 42.1. In contrast, the S&P 500’s forward multiple is 18.1 and the Nasdaq Composite’s is 25.7. Nevertheless, a majority of analysts are still recommending the stock as a ‘buy’, with a median price target of $210.10, so the jury is by no means out about the stock’s attractiveness.
Going forward, while sentiment in the broader tech sector will be a key driver for the stock, investors will likely be paying more attention to the demand outlook for EV vehicles, particularly in Tesla’s home market in the US, and increasingly in China as well, which accounts for almost half of the company’s sales.
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