Tesla (TSLA) has underperformed over the past few weeks following a disappointing production report and negative market reactions to its long-awaited Robotaxi event. As the company prepares to report its Q3 earnings results next week, I maintain a Hold stance on TSLA.
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I believe that as the market’s attention increasingly shifts to the bottom line, the company’s margins are likely to come under pressure in Q3 due to ongoing headwinds in the auto industry. This could lead to a negative reaction, although some surprises may emerge, such as regulatory credits and strong growth in its energy storage business.
Tesla’s Q3 Deliveries Miss
Tesla is scheduled to report its Q3 earnings on October 23. However, part of my neutral stance ahead of the earnings release stems from the fact that Tesla’s earnings day often feels less impactful. The company provides its production and delivery results before its financial reports, giving investors a significant preview of its performance.
In early October, the company reported 462,890 deliveries, a 6% increase compared to the same period last year but slightly below analysts’ expectations of 463,310. However, I believe this discrepancy is part of a short- to medium-term trend that investors have come to anticipate.
The reasons for not meeting expectations can be attributed to significant macroeconomic pressures, particularly the high interest rate environment, which has affected car sales on financing options—a situation that has only recently started to improve. The auto industry as a whole has faced challenges, with weak sales reports from traditional automakers such as Ford (F), General Motors (GM), and Stellantis (STLA).
However, there is more to consider. Tesla’s broader strategic shift towards autonomous ride-hailing and humanoid robots may also be impacting production. Such a significant change in strategy is likely to result in periods of contraction in its traditional electric vehicle deliveries and production numbers.
All Eyes on the Robotaxi
While I view Tesla’s current situation as cautious, one major area where the company seems to hold significant long-term potential is in its AI initiatives, particularly its shift toward autonomous ride-hailing and humanoid robots. The long-awaited Robotaxi event, which had been rescheduled several times, finally took place on October 10.
Although I see the event as a pivotal moment for the company’s next stage of growth, the market’s reaction was less favorable, likely due to a lack of detailed information. During the event, Musk announced that the company would begin manufacturing Cybercabs before 2027, but he also acknowledged his tendency to be overly optimistic about timelines.
Another significant promise made was that anyone would be able to purchase the two-seater Cybercab for less than $30,000. The challenge is that these commitments seem unrealistic within the specified timeframe, raising skepticism about the feasibility of Musk’s ambitious plans.
The Event Was Successful
Despite these concerns, I consider the event successful—not necessarily because of the occasion itself but because of the immense hype that has surrounded Robotaxi throughout the year. This year, the anticipation for the event drove Tesla’s share price from around $140 to over $260, even as the company continued to report weak sales, production, and delivery numbers.
In fact, Tesla has warned of slowing growth this year, contradicting its previous expectation of a compounded annual growth rate (CAGR) of 50%. Instead, Elon Musk has shifted his focus to directing investors’ attention toward the Robotaxi program, robotics, and other technological advancements, effectively moving the narrative away from solely electric vehicle sales.
What to Expect on Tesla’s Earnings Day
Although Tesla shares have fallen more than 8% since the Robotaxi event, and the market has already priced in Tesla’s deliveries for the quarter, my neutral outlook ahead of Q3 earnings day remains firm. I believe that, despite the delivery numbers, investors should increasingly focus on Tesla’s profitability.
Logically, the company needs to sell vehicles to support its Full Self-Driving (FSD) program and the entire ecosystem. However, gross profit may be the key metric to watch.
While Tesla should benefit from regulatory credits—which surprised many last quarter—there are concerns about potential margin compression due to aggressive pricing strategies amid rising competition. Notably, Gordon Johnson, a bearish analyst at GLJ Research, predicts that Tesla’s gross margin will decline to 15%, compared to the 18% reported by the company in Q2.
There May Be Some Positive Surprises in Store
Despite the pessimism surrounding margins, there may be some positive surprises in store. One area that has been gaining market attention is energy storage, which could provide essential support during Tesla’s strategic redirection. The company deployed 6.9 GWh of energy storage in Q3, up 72.5% from 4 GWh in Q3 2023, indicating strong performance in this segment.
Additionally, I believe that during the earnings call, any detailed insights from Elon Musk regarding the financing and production strategies for Robotaxi and Optimus at scale could positively impact the stock, even if top and bottom line estimates are not necessarily exceeded. Wall Street expects Tesla to report Q3 EPS of $0.60, reflecting a 9% year-over-year decline, and revenues of $25.67 billion, representing a 10% year-over-year increase.
Is TSLA a Buy, According to Wall Street Consensus?
At TipRanks, the consensus rating for Tesla is Hold. Among 35 analysts, 11 have issued a Buy recommendation, 16 have a Hold, and eight have a Sell. The average price target is $207.83, suggesting a downside potential of 5.63%.
Conclusion
The market has reacted poorly to Tesla’s recent production numbers and the Robotaxi event. While I believe that weak delivery numbers for Q3 were to be expected, the lack of details regarding the financing and scaling of Robotaxi production leaves a cloud of uncertainty. This seems like a smart strategy by Tesla to shift focus away from its struggling electric vehicle sales.
I anticipate that Tesla’s Q3 figures will reflect the company’s headwinds, with little hope for an improvement in the bottom line—something that investors should increasingly prioritize. For this reason, I prefer to remain on the sidelines ahead of earnings day.
