Tesla delivered a good earnings report, and no one saw it coming
When a company beats Wall Street analysts’ earnings expectations, its stock price tends to rise.
When Tesla announced third-quarter results last week, it didn’t merely beat analyst expectations — it trounced them. Cable TV tickers flashed the news worldwide. The company’s stock price didn’t simply rise; it soared.
“They pulled this off very well,” said Anton Wahlman, an investor who goes short and long in Tesla depending on the price of its volatile stock.
Now Wahlman, other Tesla investors, Wall Street analysts and anyone obsessed with Elon Musk’s high-wire style all eagerly await the imminent release of the company’s 10-Q report for the quarter.
They’ll be seeking details that go beyond the company’s preliminary announcement, looking for further clues on how Tesla managed its strong profit and cash flow performance — and to assess whether the results can be sustained into the fourth quarter and beyond.
So why was the report such a surprise? Nobody but Tesla’s top executives anticipated the blowout scale of third-quarter profit numbers. Stock analysts on average expected a loss of 95 cents per share, according to FactSet; their forecasts ranged from a $2.90-pershare loss to a 55-cent-pershare gain. Instead, Tesla turned in a $1.75-per-share profit.
"It’s such an erratic situation there, I can understand why earnings estimates are all over the map,” said David Scheider, a money manager at Scheider Wealth Strategies in New York City.
In notes to investors afterward, analysts avoided talking about their big miss. And the debate over whether Tesla stock is overvalued or undervalued continued. The better-than-expected results, said Bank of America’s John Murphy, are due to “transitory factors” that probably can’t be sustained. Ben Kallo of Baird, however, said “the flip to profitability in third quarter could be the start of a narrative shift” and push the stock higher.
That stark difference of opinion demonstrates how a consensus average can mislead to the point of uselessness if the range is wide enough.
When the media say a company “beat expectations,” they’re almost always talking about the consensus of a dozen to two dozen analysts. But if the range goes from a loss of $2.90 a share to 55 cents a share, it’s obvious that someone is misinformed or making erroneous assumptions.
There are a number of reasons why Tesla is so tough to figure out.
It doesn’t help that Musk, its chairman and chief executive, is given to wild forecasts that later prove exaggerated or fall completely flat. Two years ago he told analysts that Model 3 manufacturing would mark “a quantum change in productivity, like really, really crazy.” He said the Fremont, Calif., factory would look like a spaceship in a video game. But Tesla’s attempt to install a revolutionary new automation system to build the Model 3 flopped, and this summer Tesla built a pop-up assembly line in the parking lot under a tent.
Tesla is also unusual in how it reports some of its key financial metrics. When calculating gross margins — the sales price of a car minus the direct costs of manufacturing — traditional carmakers include research, development and engineering costs. Tesla does not, which tends to make its margins look better.
The company is opaque about the deposits customers put down on future car deliveries. In the third quarter, Tesla said it had $900 million in deposits on hand, but that includes such things as a $1,000 put down on a basic Model 3 to $25,000 for a not-yet-in-production semi truck and $250,000 for a planned new exotic electric roadster sports car. If the company broke those deposits into segments, future demand would be easier to assess.