Tesla faces profit test after US$540 billion rally
TESLA’s investors have pushed its market value up by US$540 billion this year, shrugging off shrinking profit margins as price cuts drive sales. Second-quarter results may force a rethink.
When the electric vehicle-maker reports earnings on Wednesday (Jul 19), Wall Street analysts are expecting its automotive gross margin to come in at around 20 per cent, according to the average of estimates compiled by Bloomberg. That would be a drop from around 28 per cent in the same period a year ago.
Dramatic price cuts on its vehicles have helped boost sales for Tesla but have weighed on profitability. With the stock trading at 70 times forward earnings – compared to around 5.8 times for General Motors and about eight times for Ford Motor – Tesla faces scrutiny as to how it can maintain the lead in a market of slowing sales and rising inventories.
“Margin improvement is key for the stock to continue to work in the near term,” Ivana Delevska, chief investment officer at Spear Invest, said. “If Tesla can’t deliver on margins, the rally could stall out, as investors would question the strategy to cut prices.”
Analysts’ average profit estimate for the three months ended in June has dropped by 26 per cent since mid-January. Those slumping expectations contrast sharply with the 138 per cent rally in the stock this year that has lifted Tesla’s market valuation to almost US$930 billion.
Though a large part of that rally was fueled by an investor dash for companies with exposure to AI, some of it came after several large and startup automakers said they will adopt Tesla’s tech for vehicle charging, making it almost the standard for North America. Still, analysts including Wells Fargo’s Colin Langan see a relatively limited impact from this on earnings.
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On top of that, the strength in mega-cap stocks such as Tesla is starting to look stretched, suggesting an inflection point may be close. “Leadership by mega-cap tech favorites is hitting past extremes,” said Lori Calvasina, head of US equity strategy at RBC Capital Markets, noting that the “leadership may be on the cusp of rotation.”
Still, Tesla’s earnings may end up being a side-show if chief executive officer Elon Musk gives investors highly-anticipated updates on new products, refreshes of existing vehicles and AI. A sign that margins can start improving from here on can also provide another boost to the stock. Wedbush analyst Daniel Ives expects the second-quarter to mark the trough for margins, while Morningstar’s Seth Goldstein sees them reaching a low this year before climbing again, helped by lower production costs.
“I don’t think the stock doubles from here, but with actual earnings growth and a strong statement in forward guidance, it could lead the shares higher,” Brian Mulberry, client portfolio manager at Zacks Investment Management, said.
Microsoft Corp.’s year-to-date gain of 50% has taken the stock 1.2 per cent above the average analyst price target. On a closing basis, this is the most the software giant has been above the average target since 2020, though the premium hit its highest since 2013 in Tuesday trading. Much of the 2023 rally reflects investor excitement over artificial intelligence, and on Tuesday, the stock gained after the company detailed pricing for some artificial-intelligence services. BLOOMBERG
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