Tesla Motors (NASDAQ:TSLA) is set to report its third-quarter earnings after the market closes on Tuesday. What should we expect?
Well, according to Bloomberg, Wall Street anticipates a profit of $0.11 a share, not counting special items. That's the average estimate given by 11 analysts polled by the news service.
I think a small profit is likely, and $0.11 a share could be about right. But there's no question that Tesla has faced some big challenges lately -- even as the upstart electric-car maker continues to execute at a high level.
The car to have in some of America's wealthiest neighborhoods
Although Tesla doesn't report monthly U.S. sales like other automakers, from all appearances the company's sales have continued to be extremely strong. Edmunds analyst Jessica Caldwell recently noted that Tesla's Model S is the most-registered new vehicle this year in eight of America's 25 wealthiest ZIP codes.
Of course, most of those eight ZIP codes are in Silicon Valley. It's no secret that the Model S has become a favorite of well-heeled gadget geeks. I spoke to Caldwell on Monday, and she told me that in a few of those ZIP codes the Model S led new-car registrations by surprisingly wide margins.
Caldwell thinks the Model S's popularity with wealthy techies could prove to be trend-setting. But whether the company can build on that early adopter enthusiasm to find a wider audience is still an open question.
Signs so far are promising, though. The company has begun rolling out the Model S in Europe and Asia, and demand appears to be strong. And work continues on the next Tesla, the Model X SUV. Edmunds' Caldwell thinks the Model X could draw more female customers to the brand.
But to sustain its sky-high stock valuation, Tesla will need to show that it continues to execute flawlessly on its game plan.
What investors should watch for on Tuesday
How will Tesla keep investors positive on its outlook? Profits will be important, of course, but what will help more are signs of continued confidence in its expansion. Here are a few things that investors will be watching for when Tesla reports on Tuesday.
- What kind of profits? Tesla has reported profits in each of the last two quarters, but in both of those quarters the profits came with an asterisk. Sales of green-car tax credits, a revenue stream that is expected to shrink rapidly from here, and some nonstandard accounting around the company's unusual financing program were the difference between a profit and a loss in each of the last two quarters. At some point, Tesla has to show that it can make money by making and selling its cars. Will this quarter be that point?
- How goes the overseas expansion? Reports from Tesla's outposts in Europe and Asia have suggested strong demand, but investors haven't yet seen any firm numbers. Updates from CEO Elon Musk on these fronts will be closely watched.
- Is the Model X on track? As noted above, the next Tesla will be the Model X SUV, due to go on sale late next year. Tesla managed to keep the Model S development program on track and deliver the car on schedule, an impressive feat for a start-up automaker. Will it be able to do the same with the Model X?
Meanwhile, as an investment, Tesla's stock continues to be volatile.
Why you'll have to get used to Tesla's volatility
Tesla's stock price is still extremely high. But it's not as high as it has been. The stock fell more than 17% during October, wiping in excess of $4 billion from its market cap. That drop was triggered by a couple of fires involving Tesla's Model S sedans that had been in accidents.
Those fires were no big deal from a product-safety perspective. Nobody was injured, the cars' safety systems appeared to work as designed, and U.S. government safety officials saw no reason to open investigations.
But they were enough to trigger sell-offs of a stock that has been priced for perfection, and then some. Even with October's drops, Tesla's stock is still up more than 350% this year, and it's still trading at well more than 200 times the company's estimated earnings. When stocks are that high, even tiny-seeming news items can cause big price swings.
Investors have been willing to pay up for Tesla because the company has executed exceptionally well. Its first mass-produced model, the Model S, has won award after award, and sales have -- so far -- kept pace with the company's ambitious expectations.
But getting to the next level -- getting from the first wave of early adopters to a business that is sustainable at the level implied by the company's stock price -- will be a journey filled with obstacles.
Tuesday's results should tell us more about how well Tesla is gearing up to face those challenges.
Fool contributor John Rosevear has no position in any stocks mentioned. You can connect with him on Twitter at @jrosevear.The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of 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.