Can Tesla Overshadow its 50% YTD Gains?

The world's premier EV maker is expected to report a decline in earnings despite record deliveries and increasing revenue while trading 50% higher YTD.

Price Cuts vs Profitability 

Tesla managed to deliver 422.9K vehicles last quarter, a 4% increase over the prior. That was a slowing of the pace of growth from prior quarters which weren't impacted by lockdowns in Shanghai. Tesla had announced price cuts to incentivise buyers, but given the waiting period for vehicles in most markets, it likely had a reduced impact on deliveries. The company’s CEO Elon Musk had said that the company could deliver 2 million cars this year.

Sales were boosted by reopening in China, but Tesla failed to be the largest automaker in the largest EV market. BYD took that spot, and price cuts are seen as a way to make Tesla more accessible as the market becomes more competitive. With that in mind, this quarter's earnings could be pivotal, as it will show how price cuts affect demand and profitability.

Can Tesla Increase Deliveries?

The consensus is for a nearly 30% quarterly drop in earnings to $0.86 with the average of forecasts suggesting revenue staying pretty much even at $23.7B. Focus now turns to guidance, where changes in the criteria for eligibility of tax credits from the Inflation Reduction Act mean the cheaper model 3 might no longer qualify. The key issue will remain whether the company can match demand and increase deliveries, with that seen as the focus for guidance.

With inventories growing and expected flagging demand, attention is likely to focus now on the production gap. Last quarter, Tesla produced 18K more vehicles than it sold, with the higher-end S and X models struggling to find buyers. China constituted the largest increase in sales; but 57% of vehicles produced in Shanghai were for Europe, where the sales environment is seen as more challenging with high inflation affecting consumers. Tesla could be switching from an environment in which investors worried about supply, to one where the chief concern is demand.

Triangle or Flag?

Tesla’s share price soared from $101 in January to $220 in February and is currently correcting approximately at $185. The lower highs and higher lows resemble a triangle pattern unless it turns into a case where a flag already completed down at $164 marked in March.

If the bulls can reclaim the peak of $208, the trend could continue to accelerate, clearing the path to $238 and higher in the longer end of the trend. Conversely, losing $176 could see prices drop to last month’s low, where price action would likely confirm a deeper correction.

Source: Spreadex TESLA

Key Takeaways

Despite record deliveries and increased revenue Tesla is expected to report a decline in earnings. The company's growth rate slowed due to lockdowns in Shanghai, where they made price cuts to incentivise buyers. China's largest EV maker, BYD, took Tesla's spot, leading the former to introducing price cuts to remain competitive. The upcoming quarterly report will be pivotal to see how price cuts affected demand and profitability. The consensus forecast anticipates a 30% decline in earnings with steady revenue. The focus will now turn to guidance, as changes in tax credits' eligibility for the cheaper Model 3 may impact sales. Additionally, production gaps and potentially flagging demand may become major concerns.