Tesla Sinks on Soft Q3 Results, Is a Bounce Next?

Tesla (NASDAQ:TSLA) reported weaker-than-expected results for its third quarter, sending its shares lower. The electric vehicle (EV) maker lost as much as 15.6% last week to hit the lowest levels in nearly 5 months.

This way, Tesla recorded the weakest weekly performance this year, playing in the hands of bears who were continuously warning about the stock’s rich valuation. Tesla stock is up over 72% year-to-date, despite FY 23 earnings declining from ~$6 a year ago to $3.

Prior to last week’s selloff, Tesla shares traded at ~200x trailing TTM FCF, or ~400x TTM FCF, excluding EV credits. At these levels, Tesla stock was always poised to correct lower in case the company failed to clear the Q3 earnings bar. The P/E ratio now sits around 60, down from about 75 seen earlier in October.

Tesla stock now trades near $210 – which is a key near-term support. It is likely that the stock will bounce from these levels, however, it could first move to $206 where the 100 monthly moving average is located.

How Tesla Performed in Q3

Tesla shares whipsawed after the release of a report. Initially, they surged by 2.4% in after-hours trading following the report but later dropped more than 4% on comments from CEO Elon Musk, who cautioned on the earnings call that the company's Cybertruck would not generate significant positive cash flow for 12 to 18 months after production commences.

“It is going to require immense work to reach volume production and be cash flow positive at a price that people can afford,” with the Cybertruck.

“I just want to temper expectations for Cybertruck. It’s a great product, but financially, it will take a year to 18 months before it is a significant positive cash flow contributor.”

Tesla announced on X that the production of the Cybertruck remains on schedule for later this year, with the first deliveries planned for November 30th at Giga Texas. The company also said that Cybertruck is currently in "pilot production," and the Texas factory has the capacity to manufacture up to 125,000 units per year.

In the meantime, Musk emphasized that Tesla's primary focus is on making its cars more affordable, particularly in a high-interest rate environment. As Tesla aims to make EVs more accessible to the public, some buyers remain wary of the ‘unforseen’ costs.

For instance, car insurance for EVs tends to be more expensive than that of traditional cars, which can play a notable role in the total cost of ownership. This is why, in September 2023, Tesla launched its own initiative to help lower car insurance rates. With this context in the clear, let’s take a closer look at Tesla’s performance in Q3.

Tesla delivered a soft Q3 performance with the earnings per share coming in at just 66 cents, missing the market expectations of 73 cents. Revenue jumped 9% year-over-year to $23.35 billion, up from $21.45 billion reported for the same period last year. However, analysts were looking for $24.1 billion.

Even more concerningly, Tesla generated just $848 million in Q3 cash flow while analysts were looking for as much as $2.59 billion. Tesla's third-quarter gross margin also experienced a decrease compared to the previous year, coming in at 17.9%, therefore missing the consensus by 10 basis points.

For the same period last year, Tesla reported gross margins of 25.1% while the Q2 number stood at 18.2%. Tesla reported $19.63 billion in automotive revenue while generating $1.56 billion in revenue from its energy generation and storage business.

Non-adjusted net income amounted to $1.85 billion, while the total gross profit witnessed a 22% decline when compared to the same period in the previous year. More worryingly, the total operating margin for the current quarter stood at 7.6%, signifying a significant decrease from the figure of 17.2% recorded in the year-ago quarter.

“Our cost of goods sold per vehicle decreased to ~$37,500 in Q3. While production cost at our new factories remained higher than our established factories, we have implemented necessary upgrades in Q3 to enable further unit cost reductions,” the company said.

Tesla is now focused on bringing the prices of its EV models lower before it goes “full-tilt” on the Mexico gigafactory. Commenting on the earnings call, Musk said that the company is “laying the groundwork to begin construction.

“I’m worried about the high interest rate environment we’re in… If interest rates remain high or if they go even higher, it’s that much harder for people to buy the car,” Musk commented.

“I just can’t emphasize enough how important the cost is…We have to make our products more affordable so people can buy it.”

Tesla shareholders and a long-time bull, Gene Muster, said the company had “a challenging September quarter.” Speaking to CNBC, Muster said the Q3 report was “a disappointment.”

Aggressive Price Cuts to Spur Demand

Shrinking margins are a direct result of the electric automaker’s significant price reductions and discounts since January as part of the strategy to stimulate demand, particularly in light of higher interest rates.

Tesla has embarked on a campaign marked by aggressive price cuts, sacrificing margins to increase demand for its EV models. More recently, Tesla stock declined as price cuts were announced, involving its Model 3 and Model Y versions in the United States at the beginning of October.

Tesla’s latest drop came shortly after the company’s third-quarter deliveries missed analyst expectations. The EV maker is currently striving to deliver a record 476,000 vehicles in the last three months of 2023 to meet its annual target of delivering 1.8 million vehicles.

The stock tends to drop on every new round of price cuts amid concerns that these are impacting the company's industry-leading margins. In the April-June quarter, Tesla's margins reached a nearly four-year low.

Based on the latest prices, the standard Model 3 sedan now costs $1,250 less at $38,990, while the Model Y long-range variant has a reduced price of $48,490, as shown on Tesla's website. Throughout the year, the standard Model 3 has seen a cumulative price reduction of approximately 17%, and the Model Y long-range variant has experienced a decrease of over 26%.

It could be that Elon Musk and his team also wanted to ramp up pressure on the big three, which were hampered by exhausting and expensive negotiations with the union of workers over a new multi-year contract.

On the other hand, the fact that Tesla continues to put pressure on its margins with price cuts, some shareholders have been increasingly calling for the company to start spending on ads. At Tesla's annual shareholder meeting last May, Elon Musk faced investor pressure when a shareholder challenged him about the company's advertising practices.

Musk expressed openness to the idea of advertising Tesla's features to a broader audience. He acknowledged that there are remarkable features and functionalities in Teslas that many people are unaware of.

"I think what you are saying does have some merit, and I believe in taking suggestions, and we'll try a little advertising and see how it goes."

Conclusion

The EV maker Tesla reported financial results that missed earnings expectations while CEO Musk provided a tempered outlook for its highly-awaited Cybertruck. This way, the Q3 report is likely to raise concerns among near-to-intermediate-term investors given Musk’s comments about the difficult macroeconomic environment and another setback in the Cybertruck rollout.

Tesla stock fell more than 15% last week in response to the soft Q3 print and rising tensions in the Middle East. Net-net, the stock’s valuation is now more balanced after a ~30% correction from YTD highs.

Source valuewalk