Tesla Stock Drops After Earnings – Could This Start A New Downcycle? – ValueWalk

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Shares of Tesla (NASDAQ:TSLA) are down 8% in Thursday trading after the electric vehicle (EV) business reported weaker-than-expected revenue for Q3, as well as slashed its full-year delivery target.

Tesla reported adjusted EPS of $1.05 for the third quarter, topping the consensus estimates of 99 cents, according to Refinitiv. Revenue stood at $21.45 billion, missing the estimated $21.96 billion. The world’s largest EV maker by market cap generated $3.33 billion in net income in the three-month period, up from $1.62 billion in the same quarter in 2021.

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Margins Miss as Costs Pile Up

Even more worryingly, Tesla’s automotive gross margin remained unchanged from the previous quarter, standing at 27.9%. The figure missed the average analyst estimate and was below the 30.5% figure reported in the same period last year.

Auto gross margins, ex-credit, also missed the consensus after coming in at 26.8%. Gross margins were 25.1%, lower than both the 26.6% YoY and the estimate of 26.6%. The carmaker said its profitability was hurt by raw material cost inflation and ramp shortcomings from the company’s plants in Berlin and Texas.

Tesla being able to generate 30%+ in auto gross margins was a key pillar of the bull case for the EV maker. Tesla stock price soared almost 800% from March 2020 to November 2021.

“I can’t emphasize enough we have excellent demand for Q4 and we expect to sell every car that we make for as far into the future as we can see,” CEO Elon Musk said on the earnings call.

“The factories are running at full speed and we’re delivering every car we make, and keeping operating margins strong.”

Tesla reported $18.69 billion in automotive revenue, up 55% from the year-ago quarter. The cost of revenue for its automotive unit increased to $13.48 billion during the period, up from $10.52 billion in Q2 2022, hurting margins despite Tesla raising car prices on several occasions.

The EV business hiked car prices a number of times as auto parts have become more expensive and more difficult to obtain due to supply chain constraints. The average price of Tesla cars stood at roughly $57,000 in the third quarter, up from about $49,000 in the year-ago period.

Tesla said automotive regulatory credits accounted for 1.5% of automotive revenues. The company also reported a $250 million hole in its earnings as the U.S. dollar strengthened significantly against a basket of currencies.

Musk also said the production of its new 4680 batteries is gathering momentum, though “there are challenges still ahead,” added executive Andrew Baglino. New Tesla Semi trucks will not use the new 4680, Musk confirmed.

On a more positive note, Musk said Tesla could buy back between $5 billion and $10 billion in shares, a move that is pending board approval. If confirmed, this could provide some support to Tesla stock given amid media reports that the EV maker is experiencing slowing demand in China.

Missing 2022 Target for Deliveries

Tesla is widely expected to miss its vehicle delivery target for 2022, though Musk downplayed the concerns, saying the company is seeing strong demand in the fourth quarter. He also believes that Tesla could eventually “be worth more than Apple and Saudi Aramco combined” due to its outstanding potential.

Apple and Saudi Aramco are currently the two biggest companies in the world by market cap, worth $2.31 trillion and $2.10 trillion, respectively. Musk said Tesla will not significantly reduce its production despite the risks of a recession. He described the company as “recession-resilient.”

In response to a question about Tesla’s headwinds in China and beyond, Musk said China is going through a property recession, while “Europe has a recession of sorts driven by energy.” On the other hand, Tesla’s business in North America is in a better place, though the Federal Reserve has increased interest rates “more than they should,” Musk added.

Tesla’s CFO Zach Kirkhorn said he expects the company to miss its vehicle delivery growth target of 50% by a small margin. Kirkhorn said weaker growth comes due to changes in how Tesla builds and delivers cars to customers. The EV giant delivered 936,000 in 2021 and would have to deliver over 1.4 million to achieve its original 2022 target.

Another near-term overhand for shares is Musk’s pending acquisition of Twitter. Musk offloaded over $15 billion worth of Tesla shares this year, suggesting that he intends to use a part of the proceeds to finance the $44 billion acquisition of Twitter.

According to some analysts, Musk might have to sell even more Tesla shares to finance the deal, though the billionaire recently said he has no plans to sell more Tesla stock.

Shares of Tesla are down almost 50% YTD, relative to the 32% decline in Nasdaq 100. Yet despite the downturn, the trading volume of TSLA shares remains high on most stock brokerages. The automaker has faced numerous production and supply-chain headwinds in 2022, with Musk’s complicated pursuit of the Twitter deal also affecting Tesla’s share price.

Summary

Tesla stock price is down on Thursday after the company delivered mixed-to-negative Q3 earnings. Tesla missed on both revenue and margins as rising input costs, a strong dollar, and supply chain challenges continued to weigh on the company’s core EV business.

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