Tesla Earnings: Ready To Report After Workforce, Price Cut Announcements

After surprising many investors by booking a profit in Q3, Tesla Inc TSLA prepares to report Q4 earnings Wednesday afternoon still under close scrutiny as it cut vehicle prices and announced layoffs earlier this month.

The company continues to ramp up production of its Model 3 sedan while also keeping a close eye on costs. In addition, it’s chopping prices on all models by $2,000 to help offset a reduction in federal tax credits for drivers who buy electric vehicles. The $7,500 federal tax credit for Tesla cars was cut in half earlier this month.

Even as it tries to grow production, TSLA has been under pressure to cut costs. This month, the company announced it would be reducing its full-time workforce by 7%. And just this morning, in a bid to streamline production, the company announced it plans to start using the same battery pack in all of its Model S and Model X sedans.

As usual, TSLA reported Q4 delivery numbers right after the quarter ended, and the data appeared to disappoint some investors. TSLA delivered 90,700 vehicles during the quarter.

The stock took a big hit after the company announced the Q4 delivery data and price cut on Jan. 2. It then rebounded, but lost ground over the past week. As of Wednesday morning, TSLA shares traded at around $297, down from nearly $350 a year ago but up from lows down around $250 last fall. TSLA continues to be one of the more volatile names as bulls and bears wrestle over where the company might be headed.

More about production and costs in a minute. First, let’s look at expectations for TSLA’s Q4 financials. For Q4, TSLA is expected to report adjusted earnings of $2.20 per share, on revenue of $7.07 billion, according to third-party consensus analyst estimates. In the same quarter last year, Tesla posted a loss of $3.04 per share on revenue of $3.29 billion.

Revving Up and Ramping Up

Here’s how production and delivery shaped out for TSLA last quarter:

• Total Q4 production grew 8% from Q3 to 86,555 vehicles—61,394 Model 3, 25,161 Model S and X.
• 90,700 vehicles were delivered in the quarter— 63,150 Model 3, 13,500 Model S, and 14,050 Model X. That was also up 8% from Q3.
• At the end of the quarter, there were 1,010 Model 3 vehicles and 1,897 Model S and X vehicles in transit to customers.
• The company’s Q4 Model 3 deliveries were limited to mid- and higher-priced variants, cash/loan transactions, and North American customers only. More than three quarters of Model 3 orders in Q4 came from new customers, rather than reservation holders.

TSLA said that it started 2018 with a delivery run rate of about 120,000 vehicles per year and ended it at more than 350,000 vehicles per year – an increase of almost three times. The company reported it has successfully worked to reduce labor hours per vehicle.

Still, as noted, the Q4 delivery numbers appeared to disappoint some investors, at least judging from the stock market reaction. TSLA, however, said its own data showed that Q4 deliveries met or surpassed market estimates.

Incentive Pricing, Job Cuts, Looking Globally

Now TSLA has cut prices. While bulls might argue that a price drop could stimulate more demand, the bearish counter-argument might be that TSLA had little choice considering the effect of a falling tax credit. The question might be, will the customers TSLA targets for its lower-priced Model 3 be willing to pay relatively high prices (even with the price cut and tax credit) for an electric car over a cheaper gas-powered one?

Tesla CEO Elon Musk seems determined to attract customers for lower-priced vehicles. In an email to employees this month announcing the job cuts, he noted that the 4% profit in Q3 was in part the result of “preferentially selling higher priced Model 3 variants in North America.”

Starting in around May 2019, he continued, TSLA will need to deliver at least the mid-range Model 3 variant in all markets, as the company needs to reach more customers who can afford its vehicles. That means TSLA needs to continue making progress toward production of lower priced Model 3 variants, and analysts on the company’s conference call might ask for more detail on how TSLA plans to accomplish that.

The most affordable Model 3 now, Musk noted, sells for around $44,000. That’s well above the average U.S. new car price of around $37,500, according to Kelley Blue Book. In addition, affordability could become a bigger challenge as those federal tax credits drops in half in July and disappear at the end of the year, Musk added. The company has said it plans a base Model 3 with a price of around $35,000. Autoweek recently reported that the $35,000 Model 3 is still “a few months away,” so investors might want to listen on the TSLA call for more information.

“Higher volume and manufacturing design improvements are crucial for Tesla to achieve the economies of scale required to manufacture the standard range (220 mile), standard interior Model 3 at $35k and still be a viable company,” Musk wrote in his email to employees. “There isn’t any other way.”

Another focus for the call might be on TSLA’s overseas progress. Earlier this month TSLA said that “there remain significant opportunities to continue to grow Model 3 sales by expanding to international markets.” The company plans to introduce lower-priced variants and offer leasing. International deliveries in Europe and China will start next month, TSLA said.

FIGURE 1: TESLA SHARES SAG. Despite beating analysts’ earnings expectations back in Q3, TSLA shares (candlestick) have been outpaced over the last three months by the Dow Jones U.S. Automakers Index (purple line). Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Tesla Earnings and Options Activity

Options traders have priced in an 8.9% ($26.49) stock move in either direction around the coming earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform. Implied volatility was at the 63rd percentile as of Wednesday morning. 

Weekly options activity has been higher in the 280-strike puts and the 300-strike calls.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

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