- Analysts expect a big loss as the automaker ramps up production of its Model 3.
- Revenue should improve over Q2 and Q3 2016.
- Big questions will swirl around Model 3, a capital raise, 2017 deliveries, and Autopilot.
Tesla will report third-quarter earnings after the markets close on Wednesday, and they will be closely watched.
After an epic run-up in the carmaker's stock price during the first half of 2017, when shares threatened $400 and Tesla's market cap eclipsed Ford, Fiat Chrysler Automobiles, and briefly even General Motors, investors have reversed course.
Tesla is still up 50% year-to-date, but since last week shares have slipped 8% and are now trading around $320.
Expectations vary, but analysts anticipate that Tesla will lose $2.30-$2.45 per share. A positive result would be stunning, but a narrower loss is certainly possible. On the revenue side, the estimates are around $3 billion, continuing an upward trend from the second quarter and the third-quarter of 2016.
So what else will investors be looking for?
Insight on Model 3 "production hell"
When CEO Elon Musk presided over the handover of the first production Model 3s in July, he said that Tesla was about to enter "production hell."
Production hell is now blazing away in full force as Model 3 assembly lags Tesla's goals by a wide margin. After predicting 1,500 units in September alone, Tesla managed only 260 for the entire third quarter. The objective of building 20,000 a month by December now appears unlikely.
Investors will want to know if Tesla's "bottlenecks" have been addressed and what the outlook is for both the rest of the year and for 2018, when Musk predicted half a million in annual deliveries.
For some context, Tesla has endured production challenges for all its cars: the Model S sedan, and the Model X SUV, and now the Model 3. Somewhat lost in the bad Model 3 story is the success Tesla has enjoyed with both S and X, whose sales topped 26,000 for the third quarter.
That's what helping Tesla increases revenues, even as it burns through billions to launch the Model 3.
Final delivery totals for 2017
Tesla will probably have its best year ever for total deliveries, largely thanks to the aforementioned Model S and X sales. And although the Model 3 is struggling to hit its targets, if Tesla can work out the production kinks, it could make a contribution.
Tesla has delivered just over 73,000 vehicles through Q3 2017, so a 100,000 year is certainly within reach. If Model 3 assembly lurches into gear in November and December, the final tally could be even better.
Of course, guidance for 2018 remains 500,000 — a massive increase, dependent on Model 3 production ramping up rapidly. Analysts might want to know if that target is realistic. Tesla rarely makes good on it own ambitious goals, a habit that Wall Street is used to, but a major recalibration of 2018 deliveries could weigh on enthusiasm for Tesla's story.
Another capital raise
Tesla has raised billions in equity and debt over the past two years to fund the Model 3 launch. If everything goes according to plan, the company will end 2017 with about $1 billion in the bank, along with access to some credit facilities.
Until revenue from over 400,000 Model 3 preorders start to flow in, Tesla's cash situation could become precarious. But with the stock at such elevated levels, analysts will want to know if another capital raise is on the horizon.
Tesla issued junk debt earlier this year and was able to sell it easily and at good rates, but the company did that to avoid another equity raise and the shareholder dilution that would come with it.
My feeling is that Tesla thinks it has a cushion of about $100 per share to work with and can tolerate a decline to about $250 before its flexibility around raising cash by issuing more stock becomes a worry.
Tesla is often rather cryptic about capital raises, but obviously the markets haven't discounted the stock dues to raises in the past. The opposite, in fact: previous capital raises have supported run-ups in the price.
Autopilot updates
A quiet perception has been developing over the past few months that Tesla is falling behind in the self-driving-car race.
Whether that race has any meaning is another discussion, but major automakers like Ford and GM have been buying and investing in self-driving startups and are starting to use the power of their cash-laden balance sheets to accelerate the move into autonomy.
Tesla is trying to do everything itself and has chosen a technology for Autopilot that doesn't use the expensive laser-radar systems that other players favor. On the plus side, Tesla Autopilot is in use through the automaker's fleet. On the minus side, Autopilot might not be capable of scaling beyond advanced cruise control and automated steering.
Tesla's self-driving model is consumer-focused — actual customers use it in their actual cars — while big carmakers are aiming for a fleet-based, shared-mobility approach.
GM's Cruise Automation, for example, will roll out highly autonomous vehicles in a ride-sharing or ride-hailing framework in urban environments, enabling the carmaker to carefully constrain its autonomous vehicles while attacking the largest possible market for self-driving services.
Autonomy has shifted in a short time from speculation to reality, and investors could want some perspective from Musk and his team about whether they plan to continue with their current strategy or make changes.
So what happens with the stock?
That's the $60-billion question. Whatever bad news Tesla might dispense, short of looming bankruptcy, already seems to be priced in.
Long-term investors are looking forward to 2020 when the company is supposed to be producing a million vehicles a year. And short-sellers have gotten clobbered in 2017, although the recent stock slide has vindicated some bearish skeptics.
That said, Wall Street can ignore the fundamentals for only so long, and as Tesla has struggled, established automakers have begun to enact competitive game plans that could undermine Tesla's near-monopoly on electric cars. (That's a tiny monopoly, however — electric-vehicle sales amount to only 1% of global auto sales.)
This has led some investors to turn to GM and Fiat Chrysler Automobiles. The run-up in shares of those carmakers has also made Ford and its potentially underpriced stock look attractive.
A narrower loss than expected might move Tesla shares north, but ahead of earnings, the markets look to be preparing to grab profits while the grabbing is good. The stock has been a beast in 2017, so it would make sense if investors book some gains at year-end.
A bigger question is whether a larger-than-expected loss will send shares into a downward spiral. The near-10% slide of the past week could be signaling that some investors are preparing to head for the exits, but the only new bad news that Tesla could provide would be far worse Model 3 production in November and December than expected.
It's worth noting that Tesla will also be talking about its solar and energy storage businesses on Wednesday. But it's hard to to see how improved results in those marginal undertakings will move the needle if the car business remains in trouble.
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