Tesla Inc. (TSLA) Earnings on the Horizon: Should Investors Brace for Impact?

Electric vehicle (EV) giant Tesla, Inc. (TSLA) is scheduled to report its third-quarter earnings on October 18, 2023, and the ongoing price cuts raise concerns about the company's performance during the quarter. Moreover, the company is expected to face declining margins.

In this article, I present the compelling reasons investors might want to steer clear of this stock.

The U.S. EV market achieved modest growth in the last quarter, yet the road to mainstream adoption remains uncertain. Although TSLA continues to be a major player, with the rapidly growing transition of traditional auto giants and an increasing number of small entrants, its grip on the market is loosening, with its market share declining to 50%, the lowest ever recorded from 62% a year ago.

Moreover, Kelley Blue Book (KBB) reported that U.S. EV sales surpassed 313,000 in the third quarter, marking a 50% year-over-year rise. While this sounds impressive, it only represents 7.9% of the overall market, highlighting the challenges in transitioning to EVs.

While TSLA’s price cuts to maintain market share can help it show a year-over-year improvement in revenue in the upcoming release, its EPS is expected to be down. Analysts expect TSLA’s revenue to increase 12.9% year-over-year to $24.22 billion for the quarter, but its EPS is expected to decline 29.2% year-over-year to $0.74.

The company’s EPS for fiscal year 2023 is expected to fall 16.8% year-over-year to $3.39. Also, the company has failed to exceed the consensus revenue estimates in three of the trailing four quarters, which is disappointing.

Furthermore, shares of the EV giant have declined 9.1% over the past three months and 6.8% over the past month to close the last trading session at $251.12.

Here’s what could influence TSLA’s performance in the upcoming months:

Decline in Production and Delivery

TSLA recently announced a significant decline in third-quarter production and delivery. Its total deliveries stood at 435,059 during the quarter, compared to the previous quarter's 466,140. Total production for the quarter was 430,488, down from 479,700 vehicles produced in the previous quarter. The company attributed this decline to planned factory upgrades. However, the company maintained its 2023 volume target of around 1.8 million vehicles.

Price Cuts in Selected Models

TSLA slashed prices on its Model 3 and Model Y in the U.S., intensifying its price competition shortly after falling short of third-quarter delivery expectations. The reductions, ranging from approximately 2.7% to 4.2%, began in January, reflecting TSLA's struggle to deliver 1.8 million vehicles by the end of 2023.

This move, initiated partly to counter competition from U.S. and Chinese automakers, raises concerns about TSLA's dwindling margins.

Mercedes-Benz Challenges TSLA's Luxury EV Dominance

While TSLA has been a pioneer in the EV industry, Mercedes-Benz Group AG (MBGAF) is gaining ground by introducing successful electric models, such as the EQE Sedans and SUVs, which have seen substantial sales growth.

TSLA's high-end models, like the Model S and Model X, are facing declining sales, potentially due to Mercedes-Benz's expanding EV offerings. Despite TSLA's current lead, the competition in the luxury EV segment is intensifying, indicating a shifting landscape in the market.

Deteriorating Financials

During the fiscal second quarter of fiscal 2023, TSLA’s total revenues amounted to $24.93 billion. The company’s gross profit stood at $4.53 billion. Its total expenses rose 21% from the year-ago quarter to 2.13 billion.

Furthermore, the company’s non-GAAP net income and non-GAAP EPS attributable to common stockholders came in at $3.15 billion and $0.91.

Poor Profitability

TSLA’s trailing-12-month gross profit margin of 21.5% is 39.5% lower than the 35.50% industry average. Its trailing-12-month levered FCF margin of 3.22% is 36.8% lower than the 5.10% industry average.

Stretched Valuation

In terms of forward non-GAAP P/E, TSLA is currently trading at 74.41x, 445.4% higher than the industry average of 13.64x. The stock’s forward EV/Sales of 7.86x is 612.4% higher than the industry average of 1.10x.

In addition, TSLA’s forward Price/Sales of 8.02x is 875.6% higher than the industry average of 0.82x. Its forward P/B multiple of 15 is 586.7% higher than the industry average of 2.18.

POWR Ratings Reflect Bleak Prospects

TSLA has an overall D rating, equating to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. TSLA has an F grade for Value, consistent with its higher valuation relative to its industry peers.

Its 24-month beta of 2.02 is consistent with its F grade for Stability. In addition, the stock has a D grade for Sentiment, in sync with its poor analyst estimates.

TSLA is ranked #39 out of the 51-stock Auto & Vehicle Manufacturers industry.

Beyond what I have stated above, we have also given TSLA grades for Growth, Quality, and Momentum. Get all TSLA’s POWR Ratings here.

Bottom Line

As the U.S. EV market grapples with modest growth and increasing competition, TSLA's dominance is visibly waning. Moreover, despite recent price reductions, the company may need further cuts as demand weakens.

In addition, the company reported falling production and delivery figures for the third quarter.

TSLA’s low profitability margins and stretched valuation multiples, sour market sentiments, and high beta indicate a challenging road for the stock ahead.

Stocks to Consider Instead of Tesla, Inc. (TSLA):

Given its uncertain short-term prospects, the odds of TSLA outperforming in the weeks and months ahead are compromised. However, there are many industry peers with more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) stocks from the Auto & Vehicle Manufacturers industry instead:

Honda Motor Co. Ltd. (HMC)

Isuzu Motors Limited (ISUZY)

Stellantis N.V. (STLA)

For more Buy-rated Auto & Vehicle Manufacturers stocks set to outperform, click here.

What To Do Next?

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TSLA shares were trading at $254.70 per share on Monday afternoon, up $3.58 (+1.43%). Year-to-date, TSLA has gained 106.77%, versus a 15.29% rise in the benchmark S&P 500 index during the same period.

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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