<p>For all other companies in the market, this week’s earnings report from Tesla (NASDAQ: TSLA) would be critical. The core of the bear’s campaign against TSLA shares is that the company has never shown that it is or can be consistently profitable. Tesla’s shares have risen by about 142% over the past six months in the hope that this time it will be different.
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If Tesla reports another profit in the first quarter of 2020, it will do so for three consecutive quarters. That would be a first for the company. If not, it’s a sign that, despite almost tripling in value, little has changed for Tesla from a fundamental standpoint.
Tesla bulls have been crying “this time it’s different” for several years now. And despite the fact that the company has done very little to motivate that rally troop, the share continues to trade higher.
I guess Tesla will once again fall back to a loss of earnings in the first quarter. But Tesla’s cult followers are unlikely to care about numbers.
Figures to look at
For all other car companies, there are three important earnings report numbers to see: earnings per share, revenue and guidance. Analysts are demanding $ 4.54 billion in revenue from Q1 for Tesla, up 31.8% from a year ago. They also require an EPS loss of 23 cents per share. In my opinion, the big number is the EPS number. CEO Elon Musk and Tesla bulls have repeatedly insisted that the company is self-sufficient and profitable, despite a $ 2.3 billion capital raising just two months ago.
The big guide number to look at is year-round deliveries. Tesla delivered 367,500 vehicles in 2019 and lacked the centerpiece of its guidance area of 380,000 vehicles. This year, Tesla has said it will “conveniently” deliver 500,000 vehicles. Tesla reported 88,400 deliveries during the first quarter. This number means Tesla will need an average of 137,200 deliveries in each of the next three quarters to “comfortably” hit 500,000 for the year.
It’s not going to happen. Either Tesla will release its guidance on Wednesday or it will make everyone uncomfortable by pretending to reach a goal that is misleading given the current state of the global car market.
Another key number to look at in the report is gross vehicle margins. Tesla has repeatedly said that it can achieve 25% gross vehicle margins on a large scale. Over the past three quarters, Tesla reported gross vehicle margins of 18.9%, 22.8% and 22.5%. Margins seem to be pushing higher, but they have remained at around 22.5% over the past two quarters.
The Ultimate Cult Stock
Bank of America analyst John Murphy recently downgraded the TSLA stock to “underperformance” with a price target of $ 485, indicating a 33% downside. Murphy says that Tesla’s delivery number for the first quarter was “not good” and says that the share is overvalued after its crazy six-month period.
“We would note that TSLA is facing an element of decomposition of blends by 2020 as cheaper Model 3 variants begin to cover a larger portion of the volume, which is likely to put pressure on margins, profits and cash flow,” says Murphy.
Now that we have outlined the figures that should be important for Tesla from a business perspective, it is time to explain why these figures will not matter. Former hedge fund manager Whitney Tilson recently said Tesla is the ultimate cult stock because its investors have committed devotion to stocks and its CEO Elon Musk no matter what.
Forced to pick a number, I would say two-thirds of the stock is in such hands – people like Ron Baron of Baron Capital (who just said Tesla could generate $ 1 trillion in annual revenue within a decade), Catherine Wood of ARK Invest (who has “‘very high confidence’ that the stock will reach $ 7,000 within five years), Arne Alsin of Worm Capital … and countless individual investors like my analyst Kevin DeCamp (who has owned it for several years and says that he holds until it is his first 100-digger), says Tilson.
How to play TSLA Stock
As I have said many times, there is only one way to play TSLA shares: do not. I assume that Tesla will report another loss of profit and gross vehicle margins well below 25%. I guess it will cut or withdraw its guidance for 2020. If it does not, it could be even worse given the hit that its credibility would take.
But I also guess it does not matter to Tesla investors. They have already proven that they do not need the company to achieve their goals, follow through on their promises or demonstrate a viable business model. They have a story in their head that justifies a valuation of 133 billion dollars for Tesla in the middle of a recession.
Tesla is the type of stock that does not make sense to short or buy. I would not touch it with a 10-foot pole.
Wayne Duggan has been an American News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense”, which focuses on investment psychology and practical strategies to surpass the stock market. At the time of writing, Wayne Duggan does not hold any position in any of the above securities.