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Earnings Outlook: Tesla earnings are coming, but do record deliveries mask a demand problem?

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Tesla Inc.’s record deliveries in the third quarter weren’t enough to satisfy Wall Street. Will the company’s full explanation play any better?

The electric-car company posts production and delivery numbers ahead of its formal earnings report, giving investors weeks to extrapolate trends based on limited information. This time, debate has focused on the short bit of commentary that Tesla
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provided as it posted 343,830 deliveries for the third quarter, below the 371,000 that analysts tracked by FactSet had been expecting, and also below the 365,923 vehicles that the company said it produced in the period.

Tesla explained in a press release that delivery volumes have been heavily weighted to the end of quarters “due to regional batch building of cars,” but that as production volumes have increased, it’s become “increasingly challenging to secure vehicle transportation capacity and at a reasonable cost during these peak logistics weeks.” The company has moved to “a more even regional mix of vehicle builds each week, which led to an increase in cars in transit at the end of the quarter.”

Tesla’s stock fell 8.6% in the first trading session after the deliveries were announced.

See more: Tesla reports record deliveries, but numbers are still shy of analysts’ targets

While Tesla seemed to peg its problems to delivery logistics, some analysts weren’t sure that was the only challenge facing the Elon Musk-led company these days.

“A top concern right now is demand in China as wait times seem to be shrinking,” wrote RBC Capital Markets analyst Joseph Spak. The question is whether the wait-time issue is a “blip” or indicative of “a bigger change among consumers.”

Spak added that there is “some overall concern about demand (not just China)” headed into Tesla’s report.

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Guggenheim’s Ali Faghri also wrote of potential demand issues in China, even though he thought the U.S. outlook remained strong.

“Our conclusion is that the sharp moderation in China wait times is at least partially attributable to weaker demand amid increasing competition from lower priced domestic OEMs [original equipment manufacturers],” he said in a note to clients.

“While wait times in the U.S. and Europe remain healthy, we see potential similarities between Europe and China (macro pressures, increasing competition, ramping supply),” he continued. “Overall, we see risk that TSLA is reaching demand saturation in its most important market globally (China, with tail risk in Europe).”

Such a dynamic could weigh on the company’s ability to hit its delivery goals and “potentially pressure the stock’s premium valuation as the story shifts from supply-constrained (high multiple) to demand-constrained (lower multiple),” Faghri added.

Wells Fargo analyst Colin Langan highlighted a number of puts and takes in thinking about broader demand for Tesla vehicles heading into next year.

“While IRA [the Inflation Recovery Act] will help in 2023, the economy and interest rates likely will not, particularly in Europe where an energy crisis looms,” he wrote. “If consumers are watching costs, a $60K vehicle purchase could get deferred.”

UBS analyst Patrick Hummel also chimed in that “[t]he debate about EVs has shifted to the demand side, after delivery times have come down significantly,” but he saw opportunity for Tesla in that dynamic.

“We think Tesla is best positioned to use pricing as the tool to fill its factories,” he wrote, noting that price reductions could help Tesla gain share over electric-vehicle companies and further compete against sellers of gas-powered cars.

See also: Ford stock is now a ‘sell’ at UBS as an oversupply problem looms

Tesla is due to post its third-quarter results Oct. 19 after the closing bell.

What to expect

Revenue: Analysts expect Tesla to report $22.14 billion in revenue, up from $13.76 billion a year prior.

According to Estimize, which crowdsources projections from hedge funds, academics, and others, the average estimate calls for $22.63 billion in revenue.

Earnings: The FactSet consensus calls for $1.01 a share in September-quarter adjusted earnings, up from 62 cents a share in the year-prior quarter. Those polled by Estimize are looking for $1.13 in adjusted earnings per share on average.

Stock movement: Tesla shares have gained following three of the company’s last five earnings reports. They logged a 9.8% rally in the session following the company’s most recent report.

Tesla’s stock is off 37% so far this year, as the S&P 500
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has fallen 23%.

Of the 42 analysts tracked by FactSet who cover Tesla’s stock, 27 have buy ratings, 11 have hold ratings, and four have sell ratings, with an average price target of $305.58.

What else to watch for

Production-related commentary will be worth monitoring given all the moving parts at Tesla.

“While management cited logistics issues that slowed end-of-quarter deliveries, we think this reflects the challenges ramping up production at its two new factories as well as restarting the Shanghai plant after the COVID-19 lockdowns during the second quarter,” wrote Morningstar analyst Seth Goldstein, though he saw “no long-term issues that would affect production.”

Oppenheimer’s Colin Rusch was similarly interested in a capacity rundown.

“We are expecting a substantial update on rate of TSLA’s capacity ramp in incremental capacity in Shanghai along with its Berlin and Austin facilities on the company’s earnings call,” he wrote. “With production underway in Berlin and Austin, we expect investors to be focused on the pace of ramp in the face of supply chain headwinds.”

As always, investors will be watching for any forward-looking commentary around deliveries or demand trends more generally.

“We believe TSLA will come out and reiterate their goal of around 50% growth,” RBC’s Spak wrote. “However, we do see some potential risk to 4Q22 deliveries in the U.S. as a subset of consumers may choose to delay delivery until 2023 to take advantage of IRA EV tax credits,” referring to electric vehicle credits from the Inflation Recovery Act.

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