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Can Tesla regain its Momentum?

Tesla Motors (NYSE: TSLA) will report financial results after markets close on Wednesday. The upscale electronic car company is expected to report its biggest quarterly number of vehicle sales ever. However, as Tesla trades as a classic momentum growth stock with a forward P/E of 133x, way above its 50% forecast growth rate, Tesla needs to deliver on both earnings and guidance to keep up with its share price.

In summary, fundamental and technical indicators are very mixed. As a result it is very difficult to predict with a high degree of certainty, the direction $TSLA might trade following Wednesday’s quarterly results. Therefore, I believe a neutral positioning in Tesla stock is warranted.

In the following paragraphs, I will discuss in detail what to expect and what factors investors have to pay attention to when evaluating the quarterly results.

Consensus expectations

The following table will provide an overview of consensus expectations for Tesla’s fourth quarter results.

Table 1: Consensus expectations (Median and High-Low range) (Source: Estimize and 4-Traders)

Historical performance of Tesla on earnings

Historical data of $TSLA’s performance during past quarters can provide powerful insights as to how the stock might trade under various scenario’s. Table 2, provides a full overview of how $TSLA performed during past six quarterly releases and how actual results differed from consensus expectations.

Table 2: Tesla historical stock performance following earnings (Source: Stockearnings and 4-Traders)

Looking at the historical data, I conclude that the relationship between reported sales, GAAP EPS is somewhat inconsistent. On GAAP-EPS, Tesla Motors has consistently missed analyst expectations for the past five quarters. In contrast reported sales have beaten analyst expectations for the past six quarters.

It seems that post-earnings stock performance is largely dependent on factors besides headline quarterly results. These factors include company guidance for full-year vehicle sales, the progress on projects such as the Gigafactory and the upcoming Model X.

Tesla key points of interest

Model X Update

As was noted in a previous Foresight article, future sales of the Model X is of extreme importance for Tesla’s future stock performance, as many investment banks have already priced in optimistic sales projections for yet to be released Model X. Expect bank analysts to closely scrutinize any hints Tesla management provides as to the status of the Model X. For reference, Tesla has stated that it expects to begin delivering the Model X in Q3 2015. Tesla Motors, has stated that production ramp-up will be faster than was the case with the Model S. For comparison, Tesla sold about 2700 Model S vehicles during the first two quarters the vehicle was made available. It is worth noting that Tesla CEO Elon Musk made a high profile appearance with a Model X vehicle in Austin Texas on January 15th 2015. This could be interpreted as a hint that Tesla might positively surprise the market this quarter as to the guidance of the Model X. On the flip-side if Tesla management disappointments with regards to guidance of the Model X introduction, we can expect this to weigh heavily on the stock.

Vehicle Sales

Tesla expects to sell 11,180+ vehicles in Q4 2014, which is a year-over-year (yoy) increase of 89%. In the past seven quarters Tesla has exceeded its own sales guidance, thus we can expect the market to be pricing in vehicle sales higher than company guidance. As a result, a small positive surprise in vehicle sales is not expected to materially affect $TSLA. Any disappointments with regards to Q4 2014 vehicle sales, can be expected to weigh on the stock.

Full Year Company Guidance

Based on previous comments from Tesla management, the market expects full-year 2015 vehicle sales guidance to be roughly 49,500 Model S vehicles sold, which is an increase of 50% (yoy). As noted earlier Model X guidance, will be an important catalyst for investors. Expect the company to provide full-year 2015 Model X vehicle sales guidance above 2,700 vehicles.

Update on China

On the long-term Tesla expects to sell more cars in China than it does in the United States. Thus the disappointing comments on China sales, Elon Musk provided in a recent interview, have been a serious headwind for $TSLA. Elon Musk went on to say that the weaker-than-expected demand in China was temporary. Expect bank analysts to ask for updates as to management expectations of sales in China going forward. On the positive side the market has already priced in weaker than expected demand in China, which potentially provides some upside potential if Tesla management is optimistic about China.

Lower fuel prices

Although the company is led by visionary leadership, lower fuel prices will negatively impact the attractiveness of an electric vehicle relative to internal combustion engine vehicles. As most of Tesla’s cars are pre-ordered this risk for now seems limited, but can become of key importance for quarters to come.

Sentiment and Technical Indicators

Over the past few months consensus expectations for Tesla earnings and revenue have been slashed (Figure 1). Thus the market has already priced in much weaker earnings and revenue for the current quarter. As a result the stock has traded down over the past months.

Figure 1: Wallstreet consensus non-GAAP EPS and non-GAAP revenue expectations (Source: Estimize)

Short interest on the rise

Short-interest (bearish bets) against Tesla stock has risen significantly. In November ’14 Tesla’s short interest hit a yearly low. Since then, short interest has been on the rise, as seen in the chart below (Figure 2).

Figure 2: Tesla short-interest (Source: SeekingAlpha)