Will Tesla Motors Blow Away Wall Street When It Reports Earnings This Week?

Tesla will announce its second-quarter earnings results after the market closes on Thursday. But will this quarter be as impressive as investors hope?

Jul 28, 2014 at 11:41AM

The world's most famous electric-car maker, Tesla Motors (NASDAQ:TSLA), will report its second-quarter earnings results after the market closes on Thursday. However, as one of the hottest growth stocks in the market this year, many investors worry that a sell-off could be on the horizon. Tesla's stock, after all, is up more than 83% in the past year, and with it now trading around $223 a pop, the market has already priced in high expectations for the EV maker. Let's look under the hood to see what Wall Street is expecting for the quarter and whether Tesla Motors can over deliver on those estimates.

Great expectations
Tesla has a high bar to reach when it reports this week. Analysts from J.P. Morgan are looking for Tesla to deliver 7,800 Model S sedans in the second quarter, up more than 51% from just 5,150 deliveries during the same period a year ago. That translates into 300 more cars than Tesla's prior guidance for 7,500 deliveries in Q2.

To Tesla's credit, it has a reputation for under-promising and over-delivering. In fact, Tesla has beaten expectations for the past five consecutive quarters. The same cannot be said for either Ford or General Motors.

Tesla Rims

Source: Tesla Motors.

For the second quarter, Wall Street is looking for earnings of $0.04 per share, which is a considerable improvement from Tesla's GAAP earnings loss of $0.40 per share in the previous quarter. Nevertheless, analysts are more bullish about Tesla's ability to generate revenue growth in the period. The Street is looking for revenue of $810.5 million in the second quarter, up 46% from $551.9 million a year ago.

One key metric to watch
While these figures are no doubt important, long-term investors should be more focused on Tesla's production numbers in the quarter. Tesla Motors internally differentiates between "deliveries" and "production" when referring to the number of cars it produces on a quarterly basis. During the first quarter of fiscal 2014, for example, Tesla produced 7,535 Model S cars. Yet, the company only delivered 6,457 cars during that period.

When Tesla reports second-quarter results on Thursday it expects to announce 7,500 deliveries for the quarter. However, a closer look reveals Tesla's goal of producing between 8,500 and 9,000 vehicles in the period. Planned production will likely be significantly higher than deliveries in the second quarter because Tesla recently began shipping cars to Asia and Europe. If Tesla is able to, once again, over-deliver on these projections it could send the stock soaring -- particularly because more than 25% of the shares outstanding are currently sold short. Therefore, any overwhelmingly positive news from Tesla could trigger a short squeeze in the stock.

Ultimately, if you're buying shares of Tesla Motors today at its currently inflated price of around $223 a share, you are betting on the company's ability to continue ramping production and selling cars at breakneck speed for many years to come.

Fortunately, Tesla's planned Gigafactory is one catalyst that should help the company accomplish its dream of producing a mass market EV in the next three years. After all, by 2020, Tesla expects its massive lithium-ion battery factory to produce enough battery cells for 500,000 EVs annually. That is a staggering number, considering that Tesla only plans to produce 35,000 vehicles this year. Nonetheless, Tesla's Gigafactory could make that plan a reality, and when that day comes, patient investors should be generously rewarded.

What it all means ahead of earnings
While the number of vehicles produced in the quarter should increase, battery cell supply will likely remain constrained in the period. This, together with only a modest increase in lease orders, could make it difficult for Tesla to blow away Wall Street's expectations in the quarter.

In May, Tesla chief executive Elon Musk said, "We have started Tesla leasing, but due to the lead times between vehicle orders and deliveries we expect to only lease about 200 cars in Q2. Many new orders for leased vehicles received in Q2 will be delivered in Q3, so the number of leased vehicles should grow over time."

On top of this, second-quarter operating expenses are expected to increase sequentially by as much as 30% for research and development, and 15% for selling, general, and administrative expenses, according to the company. Together, these things could make it difficult for Tesla to surprise analysts to the upside when it reports earnings on Thursday.

However, make no mistake: The long-term picture remains bright for Tesla Motors as it continues to expand operations in Asia and Europe and breaks ground on its planned Gigafactory here in the U.S.

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Tamara Rutter owns shares of Tesla Motors. The Motley Fool recommends Ford and Tesla Motors. The Motley Fool owns shares of Ford and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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