Tesla is expected to report record earnings after the bell Wednesday, but it might not be enough to satisfy anxious investors.
The company is facing growing doubts about its business after disappointing sales and a series of price cuts for its cars around the world.
“I don’t think Q4 matters other than what it means for Q1,” said analyst Gordon Johnson, one of Tesla’s harsher critics. “What’s going to be consequential is the guidance.”
Analysts surveyed by Refinitiv forecast that fourth quarter earnings and full-year earnings will both be higher than a year ago, and likely to reach records for the company. That’s good news after two quarters in which Tesla profits fell short of earlier high marks.
But on January 2, the company revealed disappointing fourth quarter sales, despite price cuts announced in December. Subsequent additional price cuts in January have raised concerns that the company is facing softening demand for its products. US buyers are now paying $44,000 for the basic version of the Model 3, $3,000 less than they were paying in late November.
That makes any guidance about future sales and profit margins that Tesla and its controversial CEO Elon Musk make Wednesday particularly important, especially after its once high-flying stock plunged 65% last year.
So far this year, shares have recovered, despite plunging 12% — their biggest one-day drop in two years — on the first trading day of 2023 in response to the fourth quarter sales. Shares closed Tuesday up 17% year-to-date.
But disappointing guidance on future sales and profits Wednesday could quickly send shares plunging. And there’s a lot of reason to be concerned.
“Will they rip the band-aid off and say they no longer will see 50% sales growth? And just how bad will the margins look?” said Dan Ives, tech analyst with Wedbush Securities.
Ives recently slashed his own Tesla price target from $250 to $175.
Through the first half of last year, Tesla insisted it could still reach its 50% annual sales growth despite the fact that its Shanghai factory and most of its Chinese sales had been shutdown by Covid outbreaks.
It wasn’t until it reported third quarter results that the company abandoned its 50% growth target for 2022. But investors weren’t prepared for how badly it would miss that mark. Fourth quarter sales left it with full-year growth of only 40%.
Ives said he thinks a 35% growth target going forward is more realistic, given the increased competition in electric vehicles from traditional automakers. He also believes Tesla will have to give some clarity on profit margins, given that recent price cuts will reduce the revenue it can expect on each vehicle. But Johnson said he thinks that Musk and Tesla will continue its tradition of making overly ambitious promises.
“The idea that Tesla will guide you to anything close to reality is unlikely because Elon Musk has a pathological problem with telling the truth,” Johnson said.
Beyond giving guidance on sales and profit margins, Ives said it is important that Musk reassure investors about non-operational issues that have become a headwind for Tesla shares in the last year.
Musk has spent the first two days this week testifying in a federal lawsuit over his 2018 tweet that he had “funding secured” to take Tesla private back when it was still losing money and facing a cash crunch. It turned out that he didn’t have the funding secured, although he again defended the tweet in testimony this week, saying he was confident that Saudi investors were prepared to back the deal that never happened.
And much of the news the last nine months has been about Musk’s $44 billion purchase of Twitter and his sale of nearly $23 billion worth of Tesla stock to help fund that purchase. Some of those sales came after Musk had declared on Twitter that he was done selling Tesla shares.
“There’s so much noise that’s been an overhang on Tesla stock, from Twitter, to the court case, to his selling of stock,” said Ives. “It would help if Musk were to say on the conference call he’s no longer going to sell stock.”
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