On May 7, Tesla (NASDAQ:TSLA) will report its fiscal first quarter earnings and host a conference call. While most of the Street will be laser-focused on the results for the single quarter, whether analysts were asleep at the wheel or not, and any adjustments to guidance, there will also be new clues that may give you a better glimpse at the long-term future.
How statements affect valuation
Like it or not and whether or not it materializes accurately, Tesla trades with a valuation based on medium-term adjusted non-GAAP earnings expectations. The 2015 analyst estimates of $3.73 (at the time of this writing) is a common benchmark used.
With so many variables and unknowns, it's very difficult to even guess what earnings will be in 2015. As such, the estimates themselves are prone to wild, volatile swings. Any adjustments in the over a dozen analysts making estimates will likely be more affected by perceptions from statements than from single-quarter numbers, and so will the valuation over the coming months. Knowing what to look for could give you an edge.
Production, production, production
As Tesla CEO Elon Musk reconfirmed in at conference in Beijing last Monday, the company once again expects that production for 2014 will not be able to keep up with overwhelming demand. This means every Tesla car is already accounted for and sold before it's even made. As such, the question is how fast can Tesla ramp up production for 2015?
The latest target that Tesla gave was for the production of 1,000 cars per week by the end of the year. In the last conference call, Musk said that a "new final assembly line" is expected to be completed by the end of the third quarter and that it will push production over the top. Is this target date still on schedule? Is the company ready to make statements about 2015? The Gigafactory will be an important contributor down the road, but it won't be ready for next year.
Musk has described the demand so far, as being like going fishing and the fish are just jumping in the boat. Is that still happening? Is the anticipated order flow still expected to be higher than the production rate in 2015?
Word on the street
So far, Tesla hasn't spent a penny on advertising. Eventually, that will likely change. The first clue that there are sustainable signs of demand softening in relation to production is that you will hear somebody at Tesla talk about an advertising budget.
If you start to hear plans for advertising in 2015, it would be a double-edged sword. Staunch bears will call it a sign of demand weakness. Staunch bulls will call it a sign of production acceleration. The truth will be somewhere in the middle, but either way it means higher costs and probably lower bottom line profit margins. No news is good news when it comes to advertising.
Tesla has primarily relied on word of mouth from happy customers to sell its vehicles so far. The result has obviously been quite successful as new orders have to be added to a waiting list. Now that a growing chunk of deliveries have landed in Europe and the very first ones have arrived in China, is Tesla starting to see the same word-of-mouth trend that the United States saw and sees? Is it stronger or weaker?
Any unexpected costs or demand?
Recall the two fires that made a lot of headlines in late 2013. It wasn't until the February conference call that we learned that there was a "significant drop in demand" to the point that Tesla executives were "quite worried about it." Demand has since rebounded, but it begs the question that you should always be on the lookout for: is there anything on the horizon that could hurt demand again that Tesla is aware of?
Tesla has done an excellent job dousing the media firestorm. On March 28, the company stated in its blog, "Starting with vehicle bodies manufactured as of March 6, all cars have been outfitted with a triple underbody shield. Tesla service will also retrofit the shields, free of charge, to existing cars upon request or as part of a normally scheduled service."
Tesla performed 152 vehicle tests. Now the questions are: what sort of costs came with the engineering, the 152 tests, future tests, ongoing tests and maintenance, and how will it affect the profit margins of current vehicles? Will the cost be passed onto consumers? Is the cost immaterial on a $120,000 car? Will it slow down the production time at all?
Foolish final thoughts
Based on next year's current estimates of $3.73, Tesla trades with a P/E well over 50. Any time just about any company trades with a P/E that high, the market is telling you that it expects long-term sustainable and rapid growth. Any changes in the long-term perception of the trend, in addition to the numbers, could change the P/E ratio and stock price accordingly. Tesla is going to need to continually provide the market with psychologically positive medium and long-term developments and expectations in order for its stock to justify its current valuation or higher.