Tesla Q4 Earnings Preview: Beyond Potential Disappointment (NASDAQ:TSLA)

established theory

Tesla (Nasdaq: TSLAThe stock is down about 45% since the company last reported earnings on Oct. 19, 2022, compared to an 8% rise in the S&P 500 (SPY).a lot is written We’ve outlined a number of Tesla’s challenges that may have contributed to the sale, and there’s no doubt that the deteriorating earnings environment is also a factor.

Tesla is set to report its December 2022 quarter results on January 25, and I would argue that investors should expect disappointment compared to current analyst estimates. However, in the long term, Tesla remains a BUY.

Fourth Quarter Shipment Shows Earnings Growth, But Expectations Are Disappointed

Tesla has already shared key insights for the fourth quarter. This is the company’s quarterly production and delivery numbers. In the December quarter, Tesla produced about 440,000 cars, 440,000 of which are attributed to the Model 3/Y.Production Fiscal 2022 saw an increase of about 47% year-on-year to 1.37 million units, but market participants were probably somewhat disappointed by the divergence of production and delivery. In the fourth quarter, Tesla delivered “only” about 405,000 cars (a nearly 40% year-over-year growth), about 35,000 less than the company produced. And Tesla’s comment is…

The company continued its transition to a more even geographic mix of vehicle manufacturing, with more vehicles in transit at the end of the quarter.

…failed to boost my confidence. Disappointment with Tesla’s 40% delivery target is compounded by Elon Musk’s delivery target of 50% year-over-year growth.

Additionally, Tesla deliveries fell short of analyst consensus expectations. According to data compiled by FactSet, the analyst reported 427,000 deliveries in the fourth quarter, and the lower end of his estimate range is 409,000, still higher than Tesla actually delivered.

So it’s reasonable to expect Tesla to have some sort of demand problem and, in my opinion, the likelihood of failing to meet analyst consensus revenue estimates of about $24.7 billion for Q4 2022. there is. Supported by Semrush website traffic data showing a decline in website traffic for Tesla vehicles.

A (temporary) margin reduction is very likely

Tesla’s top-line concerns are compounded by fears of lower profit margins. In fact, the multiple price cuts in Q4 compared to Q3 make margins very likely to shrink. With discount rates as high as 15% for Tesla’s best-selling Model 3, it’s unlikely Tesla will sustain an EBIT margin above 15%. According to my analysis, the increase in Tesla’s deliveries in Q4 and Q3 will not support margins in any meaningful way, given that the volume expansion was driven by significant price cuts. .

Arguably, Tesla’s profit margins need some correction. In the past 12 months, Tesla has claimed his EBIT margin of 16.57%, which is more than 100% higher than the industry’s respective median margin. Similarly, Tesla’s 14.95% net profit margin and 18% return on total capital are premiums of 189% and 174%, respectively. Personally, I expect Tesla’s EBIT and net profit margin to drop to 12-14% and 10-12%, respectively.

However, given Tesla’s brand value, it is reasonable for Tesla to achieve industry-leading margins over the long term with its industry-leading pricing power (Apple (AAPL), Starbucks (SBUX), Nintendo (OTCPK: NTDOY), etc.). Additionally, investors should be aware that Tesla will enjoy scale efficiencies as it continues to ramp up deliveries. So, beyond the slowdown in demand from the recession, Tesla could actually return to over 15% EBIT margins.

What to expect in Q4

If my assumptions about Tesla’s top line and margins are correct, the analyst consensus forecast for the fourth quarter is too optimistic. Wall Street now expects fourth-quarter earnings of $24.7 billion and non-GAAP EPS of $1.15, according to data compiled by Seeking Alpha.

But personally, I think Tesla’s revenue for the December quarter is likely to be around $23 billion (considering disappointing fourth quarter shipments and lower margins due to price cuts). hand). So, assuming a net profit margin of 10% to 12%, Tesla’s non-GAAP fourth quarter earnings would be in the range of $2.3 billion to $2.8 billion, or about $0.65 to 0.85 cents per share.

Why I’m Bullish

Will Tesla shares be sold after the fourth quarter is reported on Jan. 25? Well, I don’t know. While I’m clearly skeptical of his December quarter results, he’s down more than 70% from all-time highs, and it’s hard to judge what downside is already priced into the stock. is difficult.

If investors, like me, remain bullish on Tesla’s long-term potential, the Q4 results probably offer a “buy the downside” opportunity. In particular, analyst consensus expects Tesla to grow to generate revenue of $137 billion in 2024 and $243 billion in 2027. Additionally, I think Tesla will confidently claim margins above the industry given the company’s strong brand and technology exposure.

That said, I continue to argue that Tesla will sell about $10 million in cars by 2030 and claim $146.2 billion in economic profit based on a 15.5% net profit margin and various profit-certified software sales. believe.

With a cost of equity of 11%, Tesla stock looks over 100% undervalued. We calculate the fair implied price per share of TSLA equal to $294.19 based on the following variables:

Conclusion

Tesla plans to report results for the December 2022 quarter on January 25. And I argue that investors should expect disappointment compared to current analyst estimates.In my opinion, Tesla’s December quarter earnings are likely to be around $23 billion. , assuming a 10% to 12% net profit margin, Tesla’s non-GAAP fourth quarter earnings would likely be in the $2.3 billion to $2.8 billion range. $0.65 to $0.85 per share.

However, based on long-term estimates, we continue to calculate a fair implied price per share of TSLA of $294.19. Tesla remains a BUY.