What Wall Street Wants to Hear From Tesla’s Elon Musk

(Bloomberg) -- Tesla Inc. had a turbulent 2018, and early 2019 hasn’t been any smoother. To get the shares back on track, Chief Executive Officer Elon Musk has to ease concerns that sales and profitability could be hitting a wall.

An across-the-board price drop, job cuts and Musk’s warning about a “very difficult” road ahead has investors on edge heading into Tesla’s release of quarterly earnings results Wednesday. The CEO has already warned preliminary results for the fourth quarter may come up short of the record earnings the Model 3 maker posted in the prior three months.

“They’re definitely going through a ‘fork in the road’ situation,” Daniel Ives, an analyst at Wedbush Securities, said on Bloomberg Television. “These are going to be the key hand-holding quarters for Tesla.”

Tesla shares have fallen 11 percent this month through Tuesday’s close, trailing the S&P 500 Index’s 5.3 percent gain. Auto peers General Motors Co. and Ford Motor Co. have both risen about 15 percent, with GM resuming the position of top U.S. carmaker by market capitalization.

Read more: Tesla Needs 21% Rally in Weeks to Dodge $920 Million Payout

Here are the key questions analysts and investors want Musk to answer as Tesla reports after the market close Wednesday.

Margin and Outlook

In addition to telling employees Tesla’s fourth-quarter profit may shrink, Musk wrote earlier this month that staying in the black for the first quarter of 2019 will require “some luck.”

The combination of Tesla ramping up output of lower-priced Model 3s and facing more competition for the Model S and Model X will likely pressure automotive gross margins more than investors expect, Goldman Sachs analyst David Tamberrino wrote in a note. He added that the company’s commentary on the expected sales mix headwinds will be important.

The blowout third-quarter results were helped by a “very rich Model 3 mix that we believe will only fade from here,” RBC Capital Markets analyst Joseph Spak said.

Demand Ceiling?

Concerns about the demand for Tesla’s electric vehicles -- and particularly for its more expensive cars -- intensified after the company earlier this month said it would lower the prices of each model by $2,000 to partially offset the gradual phasing-out of U.S. tax credits.

“The $2,000 price cut and talk about having to lower cost further as federal tax incentives subside confirms our view that the bulk of demand is at a lower price point that Tesla can’t access yet profitably,” RBC’s Spak said.

The impending credit cliff -- the tax incentive for Teslas halved to $3,750 starting Jan. 1, and will drop to $1,875 in July -- may have also contributed to pulling forward some of the demand as consumers tried to buy the cars before the phase out, analysts said.

“We see the recent actions and company commentary confirming our views that there is likely a more limited amount of demand for the higher price point Model 3 vehicles currently being offered -- and the pent-up demand for the product may be cleared through (at least in the U.S.),” Goldman’s Tamberrino said.

Average Selling Price

Tesla originally billed the Model 3 as a more affordable electric car that would start at $35,000. But selling the sedan at that price risks crimping profitability. The market is eager to find out how the company plans to navigate this issue.

“In order to drive incremental demand for the product, we believe the price point must be lowered to the base level originally offered at unveil of $35,000,” Goldman’s Tamberrino said. He added that the price level would pressure margins, even if Tesla manages to reduce some costs, as the majority of demand is likely for the base model.

The company has recognized the challenge before. Musk tweeted in May last year that shipping minimum-priced Model 3s too soon would “cause Tesla to lose money and die.” In the letter to employees this month, the CEO said that starting around May this year, Tesla would need to deliver at least mid-range Model 3 cars -- which started at $44,000 -- in all markets to reach more customers who can afford the vehicles.

Manufacturing Strides

While the intense investor scrutiny of Tesla’s production rates has eased slightly, the company’s ability to mass-produce cars still remains under the spotlight.

“It now appears that third quarter 2018, not fourth quarter which we had previously modeled, was the peak earnings potential for Tesla, even if it is able to scale to the maximum 7,000 Model 3 per week that the company believes it can hit without substantially more capex,” Cowen analyst Jeffrey Osborne said.

Any insight that Tesla offers on its production rate and associated need for capital expenditure is going to be crucial.

The Numbers

  • 4Q adjusted EPS estimate $2.15 (range 98c to $4.34)
  • 4Q revenue estimate $7.07 billion (range $6.79 billion to $7.72 billion)
  • 4Q capital expenditure estimate $603.9 million (range $250 million to $724 million)
  • 4Q free cash flow estimate $411.5 million
  • 4Q adj. automotive gross margin estimate 22%
  • 1Q capital expenditure estimate $611.2 million (range $250 million to $750 million)
  • 1Q adj. automotive gross margin estimate 20.4%

More Data

  • Tesla has 13 buys, 9 holds, and 15 sell ratings, and the average analyst price target is about $323, according to data compiled by Bloomberg
  • Implied 1-day share move following earnings is 10.9%
  • Shares rose after six of prior 12 earnings announcements

Timing

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