Tesla Approaches Earnings With Wall Street's Tempered Optimism

(Bloomberg) -- After months of production “hell,” then a period of mayhem involving Elon Musk, Tesla Inc. may finally be entering a new era -- one in which it makes money.

The electric-car maker is approaching its earnings report Wednesday with much of Wall Street suddenly gushing with enthusiasm about its prospects. Musk, who’s said he’s comfortable predicting that Tesla will post profit and positive cash flow every quarter going forward, excited investors by hastily scheduling the release of results earlier than expected and with just two days’ notice.

Tesla rose as much as 3.5 percent in early New York trading Wednesday, before reversing gains, a day after after surging 13 percent on speculation that Musk was in a hurry to share good news. The stock also got a boost from Citron Research’s Andrew Left -- a vocal, long-term critic who had been shorting the shares -- announcing that he had changed his view. He’s now long on the company, saying it’s hitting stride with Model 3 production and snagging customers from the likes of Mercedes and BMW.

“When he says they’re going to be cash-flow positive, possibly this quarter, I’m not going to doubt it,” Left said of Musk on Tuesday in a Bloomberg Television interview.

When Musk was making “a sideshow of himself” in recent months, Left said it distracted him and others from an underlying business that’s turned a corner. The Tesla chief executive officer failed in his short-lived bid to take the company private, and agreed in a settlement with the Securities and Exchange Commission to relinquish the role of chairman.

Tesla delivered 83,500 vehicles in the third quarter, with many of those being higher-priced models. In an email to employees on Sept. 30, Musk said the company was “very close to achieving profitability and proving the naysayers wrong.”

Some bears are now conceding that it’s likely that Tesla earned a profit last quarter -- a rare feat for the company.

“We fully expect that Tesla has found a way to show a profit for the third quarter and would be very surprised if they don’t, given the hoops they jumped through to do so,” David Kudla, chief investment strategist for Mainstay Capital Management, who’s bet against the company, said in a note Tuesday. “Tesla must go back to the capital markets for money, but maybe they want to get a profitable quarter on the books first.”

While short interest in Tesla has been declining since Musk’s controversial August 7 tweet about taking the company private, there has been some renewed interest from short sellers in the last week, according to financial analytics firm S3 Partners. Tesla has now regained the number two spot among the most shorted U.S. equities after Apple Inc.

Here’s what to watch for from Tesla’s report on Wednesday:

ZEV Credits

If Tesla turns a profit, it’ll be only its third on a quarterly basis since 2013. One factor that could help the company get over the hump this quarter is the sale of the zero-emission vehicle credits to other automakers, which need them to meet mandates in states led by California. ZEV-credit sales can be lumpy -- Tesla reported $50 million of them in the first quarter, but none in the second quarter. Analysts are on the lookout for whether the company pulled this lever to boost revenue.

Customer Deposits

Tesla takes refundable deposits from customers before their cars -- or solar roofs -- are in production. At the end of June, deposits stood at $942.1 million. With more Model 3 sedans now being delivered, it’s not clear how many reservations have been converted to actual sales, and how much more pent-up demand is still left for the company to work through.

Seeking Guidance

Last quarter, Tesla gave a forecast for how many Model 3s it would produce in the next three months and said deliveries would exceed that total. The company hasn’t yet said whether it achieved a goal to make 6,000 of the sedans a week by late August and has been vague about when it’ll get to a 10,000-a-week rate. Musk has walked back previous plans to get there by sometime this year.

The Board

As part of his and Tesla’s settlement agreements with the SEC related to his go-private tweets, Musk must step down as chairman by mid-November, and the company must appoint two new independent directors to the board by late December. So far, Tesla has been mum on the status of the search process.

And here’s a roundup of analyst commentary ahead of the results:

Goldman Sachs, David Tamberrino

Most Tesla investors that Goldman Sachs spoke with believe the third quarter will be a positive event for shares, with the company showing positive free cash flow generation and the potential for positive adjusted earnings per share.

While third-quarter results have the opportunity to be another solid quarter, our views on the demand profile and the company’s gross margins have not changed.

Sell rating.

Barclays, Brian Johnson

Estimates that Tesla may have boosted its cash balance by about $800 million in the quarter, bringing the company’s balance to roughly $3.5 billion.

Sharp increase in production and deliveries “sets up a bear trap.”

Underweight rating.

Morgan Stanley, Adam Jonas

Tesla’s surprise early scheduling of third-quarter earnings is more likely a positive sign than an adverse sign.

The pull-forward coincides with an inflection of Model 3 deliveries and could be a catalyst for a positive fourth-quarter guide.

Timing of release could align with potential financing plans.

Equal-weight rating.

Baird, Ben Kallo

The focus will primarily be on cash generation, and positive cash flow will be sufficient to drive shares higher.

Management may provide additional details on the potential to incrementally increase production over the next year.

The announcements of a new chairman and independent directors will be the next focus, and potentially next catalyst.

Outperform rating.

New Street Research, Pierre Ferragu

Expects major free cash flow beat in third-quarter, and continued positive free cash flow in fourth-quarter and beyond.

Equity raise is still an option further down the line to strengthen the balance sheet, but only in good market conditions and at the right price.

Buy rating.

Consumer Edge, James Albertine

Business fundamentals improved steadily in the third quarter, driven by the ramping up of well-equipped Model 3s deliveries sold for $50,000 to $55,000.

Key questions will be around the sustainability of Model 3 profitability, assuming transaction prices fall over time, and how much capital Tesla will need to deploy for investments including the Model Y and a second gigafactory in China.

Equalweight rating.

JMP Securities, Joseph Osha

The expertise Tesla has accumulated in key aspects of electric vehicle development and manufacturing is very difficult to duplicate.

The company can make it through the next 18 months without having to raise money, but there is little room for error. Tesla would be well served by raising several billion dollars in additional equity capital.

Initiates coverage with a market outperform rating.

Just the Numbers

  • 3Q revenue estimate $6.27 billion (range $5.21 billion to $6.94 billion)
  • 3Q adjusted loss per share estimate 8c (range loss/share $1.75 to EPS 88c)

Data

  • TSLA 10 buys, 12 holds, 13 sells; avg PT $304: Bloomberg data
  • Avg absolute change after prior 12 earnings: 6.6%
  • Shares rose after 6 of prior 12 earnings announcements
  • Adjusted EPS beat estimates in 6 of past 12 quarters

Timing

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