Investing is never a one-day thing, but every day can be exciting.
The next quarter is another long-awaited earnings report from Tesla (TSLA -0.09%).
The company plans to provide shareholders with an update on its financial statements for the three months to September on October 23. Investors will be paying attention to how sales, profit margins, and cash flow have changed, and what that means for Tesla’s financial health.
Investors are hoping Tesla will emerge victorious on the latest earnings call after its highly anticipated “We, Robot” event failed earlier this month, sending the company’s stock price crashing. The electric vehicle (EV) and renewable energy giant’s sales growth has slowed, and its stock price has fallen 46% from its record high in 2021. Perhaps this is a buying opportunity for those focused on the long term.
Should investors buy Tesla stock before the October 23rd earnings release?
Shipping volume growth slows and profits shrink
Tesla has seen slowing growth in deliveries of its EV product line in recent quarters. Deliveries totaled 463,000 vehicles in the third quarter, up from 435,000 in the same period last year, but below the record quarterly figure of 485,000 reported in December last year. The company has struggled to grow even after reaching this size because its vehicles are expensive. It also doesn’t help that the Cybertruck, the only new model released in recent years, is an expensive niche product.
To move the metal, Tesla has slashed the average selling price of its vehicles. This can be confirmed not only directly on the website, but also downstream in the used car price. The average price of a used Tesla car is currently $32,000, but at the beginning of 2023 it was more than $50,000.
The decline in selling prices affected Tesla’s gross profit and thus its bottom line profit margin. Gross margin was just 18% last quarter, compared to nearly 28% at the start of 2022. Operating margin followed a similar trend, coming in at just 8.73% last quarter.
Tesla’s free cash flow has reversed due to shrinking profit margins. Free cash flow was more than $7.5 billion higher than two years ago. Revenue fell to $1.7 billion over the past 12 months and was negative for the first six months of 2024. If the company isn’t careful and allows this trend to continue, it will soon start losing large amounts of cash.
What about robots and self-driving cars?
At its “We, Robot” event on October 10, Tesla essentially announced a shift in focus from traditional car manufacturing to robotics and self-driving cars. The company is investing in a product called CyberCab, which functions purely as a taxi without a driver. The company builds a humanoid robot called Optimus that handles menial tasks. The company uses Dojo computers to build artificial intelligence (AI) infrastructure and software. These seem to be the company’s main focus, rather than vehicle updates.
However, problems can occur. The lack of growth in car deliveries has impacted Tesla’s free cash flow generation, which is fueling investments in AI, robotics and self-driving cars.
These projects are far from commercially viable. In the best-case scenario, Tesla’s profits will increase within a few years, making a 10-year timeline more likely. For the past decade, CEO Elon Musk has said self-driving cars are only a few years away, and has been incorrect about how long it will take. It may not be wise to bet on his optimistic schedule again.
If Tesla devotes all its resources to these three cutting-edge technologies and takes longer to bring them to market than investors expected, the company’s financial position could deteriorate further.
TSLA Free Cash Flow Data by YCharts.
There are no signs that the EV sector is ready to take the next step, especially as shipments slumped again in the third quarter.
Stick to what the numbers say
There are many competing theories about Tesla. The company has its hands in many pies and loves to look good with product announcements, but it’s best for investors to ignore the breaking news and stick to the numbers.
Tesla’s market capitalization is approximately $700 billion. It generated free cash flow of $1.7 billion and operating income of $7.2 billion in the trailing 12 months. This means the company trades at 400 times free cash flow and 96 times operating income. No matter how ambitious the company is, it’s too high a price to pay for a stock aiming for a $1 trillion market cap.
Most stocks trade at P/E ratios below 30x. Even the best growth stocks typically have P/E ratios of only 40 to 50 times. Tesla is trading at a much higher price than this and has just announced overwhelming delivery numbers.
There’s no reason to buy Tesla stock ahead of Wednesday’s third-quarter earnings report.
