Elon’s Encore: Predicting the Surprises Tesla Has in Store Next

(Bloomberg) -- When Tesla Inc. reports earnings Wednesday, Elon Musk will be trying for a repeat performance.

The electric-car maker’s shares have been on an unprecedented ascent since the chief executive officer crammed his last release with positive updates. Tesla didn’t just blow earnings estimates out of the water, returning to profitability faster than Wall Street was expecting. Musk also reported being ahead of schedule opening a China plant and bringing out the Model Y crossover, kicking off a rally that’s been buoyed since then by record deliveries.

Tesla will have to clear a higher bar this time. Analysts are expecting an adjusted profit of $1.74 a share for the fourth quarter, a little short of what the company earned both in the prior three months and year-ago period. But there are several levers Musk, 48, could pull to support the stock, which has climbed 33% already this year and 119% since he last reported results.

Model Y

In the months since Musk said the Model Y would be ready to launch this summer, sleuths have spotted prototypes in warm- and cold-weather states, spurring speculation that production could begin even sooner.

The Model Y also has shown up on the National Highway Traffic Safety Administration’s database for tracking vehicle identification numbers, or VINs. The Performance AWD version of the crossover also has appeared on a California Air Resources Board site that hints at driving range.

If Model Y deliveries are imminent, it will be another indication Tesla has turned a corner. Musk predicted during the last earnings call that the vehicle will outsell the S, X and 3 combined, without giving a time frame. While the CEO has a tendency to over-hype, SUVs are hot worldwide, so it’s not outlandish to expect the Model Y to catch on quickly. One bull has predicted it could carry the company to at least 550,000 total deliveries this year, from 367,500 in 2019.

Autopilot

In October, Musk said Tesla was pushing to release a beefed-up version of a feature within its suite of driver-assistance technologies branded Autopilot. He expected a more advanced mode Tesla bills as “Full Self Driving” would be available for limited release to people who paid extra to get early access to certain software updates.

Musk described a “feature-complete” version of the system that would enable Tesla cars to drive passengers from their house to work, “most likely without interventions,” though the driver would still need to supervise.

If Musk pulled this off, it could generate more than just bragging rights, which brings us to the next trick Tesla could have up its sleeve.

Deferred Revenue

Earnings improved in the last quarter in part because the company recognized about $30 million of deferred revenue based on Musk releasing Smart Summon, a controversial addition to the Autopilot suite. The feature allows Tesla owners to tap their smartphone and remotely call their car to drive itself from elsewhere in a parking lot.

Musk has been charging customers for performance features before Tesla’s vehicles are actually capable and socking away that revenue to be recognized later. At the end of September, the company said it expected to cash in on $662 million of deferred revenue in the following 12 months.

Regulatory Credits

Another revenue source Tesla can tap into that’s difficult for analysts to model for are the regulatory credits the company can sell to other automakers that need them to comply with emissions standards.

Tesla generated $461 million in revenue from these credits in the first nine months of 2019, up 42% from the year-earlier period. Analysts expect this business to take off in the years to come, since Europe and China are making their car-pollution rules stricter.

Fiat Chrysler Automobiles NV reached a deal last year to pool its fleet with Tesla’s in Europe. The amount of money Fiat Chrysler has said it will fork over—about $2 billion through 2023—will effectively fund the cost of the new factory Musk plans to open near Berlin, Ben Kallo, an analyst at Robert W. Baird & Co., wrote in a report earlier this month.

China

China was a source of much optimism for Tesla toward the end of the year, with the company handing over the first Model 3s assembled at its new factory near Shanghai to local employees. Deliveries to the public started the first week of January and was a dance-worthy occasion.

The coronavirus that’s claimed the lives of at least 100 people in China’s Hubei province has sent markets tumbling and raised concern about exacerbating the nation’s auto-sales slump. Electric vehicles could be hit particularly hard since demand has been concentrated in major cities, Robin Zhu, a Bernstein analyst, warned in a report Monday.

The public-health crisis casts a cloud over a promising story Musk could still shed more light on, focusing on the longer term. As of the end of last year, only about 30% of the parts being used to build Model 3s near Shanghai were sourced locally.  The goal is for that number to reach 100% by the end of the year, reducing the company's costs and enabling Tesla to keep lowering prices and increasing sales.

To contact the editor responsible for this story: Craig Trudell at ctrudell1@bloomberg.net

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