How to read TSLA's Q3 Earnings
(published Nov 4, 2013 by DaveT)
The key to interpreting TSLA’s Q3 earnings (and any earnings report) is to focus on the expectations of the investors and not the analysts.
Investor vs Analyst Expectations
Often people look to analysts estimates for EPS, revenue, margin, etc, and base their interpretation of the earnings report off of how they company fared against the analyst estimates. The problem with this approach is that the analysts aren’t the ones holding the majority of the common stock shares. Some analysts represent companies that don’t even have any shares in the company. So, whether the companies earnings disappoints or surprises these analysts is largely irrelevant.
For young, high-growth companies often investor expectations and analysts expectations are quite different. One example is with TSLA’s Q2 earnings. They beat analysts estimates by a blow-out but in my opinion didn’t blow out investor’s expectations (rather just met them), thus after a quick post-ER pop to the 150s TSLA then started a descent down to under 140s. Many people were surprised because they were so focused on the analyst estimates and how much TSLA had beaten them by, but they weren’t as focused on investor expectations and whether TSLA had surpassed them or not. Since TSLA only met investor expectations (or barely and minimally surpassed them), the stock didn’t have the immediate momentum needed to keep pressing and making new all-time highs.
Another example is SPWR’s Q2 earnings that was talked about in the alternative energy thread. Some of us were expecting blowout earnings enough to spark a short-squeeze. SPWR blew out analyst estimates for Q2 earnings but the stock retreated because it just didn’t meet or surpass investor’s expectations, which were sky-high because of a big run-up until earnings. A lot of people in the alternative energy thread were confused why the stock went down when they had beaten analysts earnings by significantly. The reason is because analysts estimates don’t mean much; it’s all about investor expectations.
As a company grows larger and growth slows, then often analyst expectations and investor expectations will line up and there won’t be large divergences. For example, for companies like GOOG or AAPL the information out there is plentiful and the stock is held by so many institutions that when analysts give their estimates for earnings they often line up very closely to the expectations of investors. In these cases often the analysts represent companies that hold a position in the company. And since there isn’t a lot of surprise information (that can be more easily present in younger, higher-growth companies), then earnings tends to focus more around analyst estimates because they reflect investor expectations. In those cases, it’s fine to look and focus (to some extent) on analyst estimates to help interpret earnings.
TSLA Q3 Expectations
Analyst estimates going into TSLA’s Q3 ER are modest. Most are projecting between 5000 and 5500 cars delivered. However, this doesn’t mean much. Again, it’s all about the expectations of the investors. What do investors (the vast majority who hold stock) expect?
I would say that investors expect greater than 5000 cars delivered and probably around 5500 cars delivered. Some might expect higher, but I think much of those expectations have been tapered with the recent TSLA price action bringing the stock down under 160 for a few days.
However, investor expectations aren’t even focused on Q3 results (# cars, eps, revenue, margin, etc). Investor expectations are focused around 2014 and how fast Tesla can ramp production and thus increase revenue (which will in turn justify a growing stock price).
This is why Q3 earnings isn’t really about Q3. Sure, Tesla might surprise on gross margin and reach 21% or 22% this quarter. It really doesn’t matter. Tesla might surprise and have delivered close to 6000 cars, or they could disappoint and have delivered 5000 cars. But it really doesn’t matter because that’s not where the bulk of investor expectations are. Investors are more focused on how fast Tesla can grow in the coming several months to a year and this is all dependent on how quickly Tesla can ramp production.
Stock price follows revenue
One of the reasons why TSLA had a slumpish October is because of production constraints. Tesla was not able to ramp Model S production quickly enough to prop up the bullish uptrend stock price past the 200s. Demand for the Model S is robust and if Tesla produced 30,000 cars in 2013, they most likely would have sold every single one of them. If they make 50,000 cars next year they’ll likely sell every single one of them as well. But as we know, Tesla has been facing production challenges with a few suppliers not able to ramp up supply of certain parts, thus limiting the number of cars they’re able to produce. The latest (from a weibo pic) shows Tesla at 570 cars/week in late October. Tesla will likely close the year at slightly above 600 cars/week and slightly surpass their 21,000 cars guidance for 2013.
In order for TSLA to continue it’s bullish uptrend toward the 300s, Tesla needs to show revenue growth. Each quarter they should be delivering more cars than investors expect and revenue should come in greater than investors expect as well. This is fuel the stock price upwards. This is only possible on two conditions: 1) Model S demand is robust and growing, and 2) Tesla is able to scale production to meet demand.
Now we know that #1 (demand) is there, but the question is with #2. When is Tesla going to be able to produce enough cars to meet demand? If demand is 50,000 Model S cars worldwide, then what is it going to take to produce that many cars?
Q3 is all about guidance
In a recent interview in Germany, Elon Musk for the first time alluded that Tesla would try to reach 1000+ cars/week production rate by the end of 2014 (previously he had mentioned a 800 cars/week goal by end of 2014). If they start 2014 at 600 cars/week and end 2014 at 1000 cars/week, that would average 800 cars/week (x 50 weeks) or a 40,000 annual production for 2014.
A few weeks ago, I was a bit disappointed to learn about the 570 cars/week production rate in late October since that meant that Tesla would probably enter 2014 at slightly above 600 and possibly end the year at the 800 cars/week rate that Elon had previously mentioned. That would mean about 35,000 cars delivered in 2014, and if Tesla guided FY 2014 they might even be conservative and give a guidance of 30,000-35,000 cars. The problem is that anything under 33,000 cars delivered would be disappointing to investors IMO. 33,000-34,999 investors would tolerate. 35,000 would meet investor expectations (as would anything up to 39,999). I think 40,000 guidance for FY 2014 would surpass investor expectations, and that would be the key figure to look for.
Q3 Earnings Scenarios
Scenario #1: FY 2014 guidance given at 30,000-33,000 cars
This is disappointing to investors and will not bode will for TSLA stock unless other parts of Q3 are ridiculously amazing (ie., 25% gross margin already achieved, 6000 cars delivered, etc).
Likelihood: 10%
Scenario #2: FY 2014 guidance given at 35,000 cars
This will likely meet investor expectations and should be neutral to positive to the stock, depending on the other parts of Q3 (# cars, revenue, gross margin, etc).
Likelihood: 25%
Scenario #3: FY 2014 guidance given at 40,000 cars
This is likely surpass investor expectations and will be good for the stock price, and I would see TSLA taking out all-time highs before the end of the year.
Likelihood: 40%
*Note: a blend of scenario #2 and #3 is possible if Tesla guides 35,000-40,000 cars for FY 2014.
Scenario #4: FY 2014 guidance given above 40,000 cars
This would be blowout, as long as the other parts of Q3 earnings are strong, and as long as the guidance is clearly laid out in the shareholder letter.
Likelihood: 10%
Scenario #5: FY 2014 guidance not given
It’s possible Tesla doesn’t even give guidance for 2014 and chooses to wait until late Feb next year when it delivers Q4 earnings. In this case, much of the earnings will be dependent on hints given to production constraints being overcome and the other parts of Q3 earnings (# cars, revenue, gross margin, etc).
Likelihood: 15%
I like the map out the various scenarios and assign percentages because it details the complexity of the situation, and is a more helpful tool to me to make decisions.
My personal take
Overall I’m bullish going into Q3 earnings, partly because October has been a rough month for TSLA and has tapered investor expectations going into the earnings call. However, the main reason I’m bullish is because Elon hinting that are shooting for 1000+ cars/week by the end of 2014 and the implications this gives to a good FY 2014 guidance number (ie., possibly 40,000 cars). If I had to pick one of the scenarios above, I’d choose a blend of scenario #2 and #3 with Tesla guiding a range of 35,000 to 40,000 cars. My second choice would be 40,000 cars guidance.
As for the other parts of Q3, here’s my take (below). But if you take anything from this post, don’t overly focus on analyst expectations because it’s not about them, it’s about investors and their expectations. And right now, investors in TSLA don’t really care about beating analyst estimates for eps by a few cents. Investors are focused on 2014 production and if Tesla can ramp successfully enough to grow revenue at a fast enough pace to sustain TSLA’s momentum.
My Q3 Earnings Estimates
Earnings estimates is largely based on the number of cars Tesla delivered in Q2. My estimate is 5650 cars delivered in Q3. Here’s how I reached it. Tesla ended Q2 at slightly under 500 cars/week, then they took first week of July off. I will assume they resumed production at 500 cars/week and ended the quarter at 550 cars/week (since we have a 570 cars/week pic from late Oct). 525 (avg of 500 and 550) x 12 weeks = 6300 - 400 in transit to Europe - 200 loaners/store cars - 50 U.S/Canada transit = 5650 cars delivered in Q3.
Attached are my Q3 estimates (using
sleepyhead’s excel sheet). The main differences from sleepy’s figures is that I’m estimating lower # cars (5650), slightly lower ASP, lower GHG/Cafe credits and ZEV credits (due to European cars shipping in Q3), higher SGA expenses, and slightly lower gross margins (21% inc cafe credits). DonPedro, with whom I had some good conversation with in the Q3 thread, shares his estimates here: (
Q3 2013 results - projections and expectations - Page 57). I share his # cars delivered estimated but I come in with lower ZEV credits, lower ASP, slightly higher expenses, and lower eps.
Highlights:
5650 cars delivered, 21% gross margin (inc cafe credits), $605m revenue, 18.6m non-gaap income, 0.14 eps (non-gaap)
View attachment 34707
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Excellent analysis and post as usual Dave, thank you for that.
Just a couple points. 1) What do you think about sleepy's much more bullish Q3 estimates that he posted earlier? 2) Considering today's price action along with rumblings of a ramp up in production over the weekend, could we be seeing a "buy the rumor" today and a "sell the news" on Wednesday?
Regarding sleepy's Q3 estimates, I actually have no major problems/issues with them. I'm a bit more conservative across the board (# cars, revenue, gross margin, expenses, etc), but we are both in the same range in estimates. Personally I don't think it matters much if Tesla reports a $0.14 eps non-gaap vs $0.34 eps non-gaap. It might sound like a big difference, but that's not where investor expectations are right now. The vast majority of TSLA stock holders don't care if TSLA makes $10m less or more this quarter. That's not why they're invested in the company/stock. The stock will move higher based on Tesla projecting that they're making major progress in overcoming supplier constraints. If they show that they're having more difficulty than expected with supplier constraints then this will not be good for TSLA.
Regarding "sell on the news" possibilities, I personally think that it depends on the expectations going into earnings. If we head into earnings in the 180s and TSLA only guides 33,000 cars for FY 2014, then we could have some downward momentum on the stock. The higher we enter earnings, the greater the expectations are from investors. Either way, with such a large diversion of beliefs surrounding TSLA I'm expecting volatility to continue.
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@DaveT which interview did he say this? I've seen a couple of the German interviews but don't remember him saying this. I do remember in one of the launch videos he said that with the battery deal they would be able to do up to 1200 cars. But I don't remember him stating anywhere that their target was anything close to this.
Thanks for your post.
@justdoit - I believe it's from this video:
Frontal 21 Interview
If you haven't watched the video, make sure to watch it in full. And also reply back here and let us know the exact time when Elon mentions that they're currently doing 25k annual rate (maybe 30k) and are looking to double it by end of 2014. Note: 25k annual rate is 500 cars/week x 50 weeks. 30k is 600 cars/week x 50 weeks. So doubling would be at least 1000 cars/week or 50k annual run rate.
Edit: added 11-14-13 Q3 post to this post so the first post of this thread would welcome new readers.