Please ensure Javascript is enabled for purposes of website accessibility

What to Watch When Tesla Reports Earnings

By Daniel Sparks - Updated Jan 21, 2020 at 9:24AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

With shares surging more than 100% in recent months, investors will be watching closely.

It would be difficult to overstate the importance of Tesla's (TSLA 1.66%) fourth-quarter earnings release later this month. The report follows a period of extraordinary gains for the stock. Shares have more than doubled since the beginning of October, giving the company a market capitalization of over $92 billion.

Investors will look to the electric-car marker's fourth-quarter update on Jan. 29 to see whether the company's underlying business is living up to the high expectations priced into the stock. Among other things, investors will be looking for signs of operating leverage and further growth in demand.

Here's a preview of some of the key items investors may want to check on when Tesla reports earnings.

Tesla's Model S, 3, X, and Y

Tesla vehicles. Image source: Tesla.

Automotive gross margin

Until Q3, Tesla's automotive gross margin was moving in the wrong direction, sliding from 25.8% in the third quarter of 2018 to 18.9% in the second quarter of 2019. Particularly troubling was the fact that gross margin was declining despite Tesla's improved Model 3 production volume. Investors were hoping higher production rates would lead to economies of scale and -- in turn -- a higher automotive gross margin. Fortunately, in Q3, Tesla's auto margin finally notched higher to 22.8%, giving investors more confidence in the company's ability to return to a gross margin of around 25%.

While some of this sequential improvement was due to the recognition of deferred revenue for the Smart Summon feature Tesla released to customers during the quarter, management said margin was also impacted by "fundamental improvements in our operating efficiency, including higher fixed cost absorption, reductions in manufacturing and material costs and continued improvements in vehicle quality."

Investors should look for further sequential improvement in Tesla's automotive gross profit margin since vehicle production and deliveries both hit record highs during Q4.

Shanghai factory production rate

2019 was an important year for Tesla's factory in Fremont, California. The automaker wrapped up the year with a Model 3 production run rate of about 350,000 annually -- up from a run rate of about 250,000 one year earlier.

In 2020, however, investors will have their eyes on Tesla's new factory in Shanghai. The factory, which builds Model 3 vehicles for customers in China, went online in late 2019. By Jan. 3, Tesla had made "just under 1,000 customer salable cars" and had started deliveries.

Investors should look for an update from management on Tesla's weekly production rate for vehicles in the market.

Vehicle delivery guidance

Finally, investors may want to look to Tesla's guidance for full-year vehicle deliveries in 2020. The company's outlook will likely give insight into whether demand is continuing to track upward. In addition, the forecast will provide a glimpse into management's confidence for its production and product launch plans during the year. Not only is Tesla's Model 3 production volume likely to increase throughout 2020, but the automaker plans to release a new vehicle -- Model Y -- sometime around the middle of the year.

Tesla will report its fourth-quarter results after market close on Wednesday, Jan. 29. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$674.90 (1.66%) $11.00

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.