Tesla Earnings Are Mixed, But Musk Predicts ‘Epic Q4,’ Stock Buyback

Tesla (TSLA) earnings topped expectations late Wednesday, though revenue came in on the soft side. TSLA stock slipped after hours, but cut its losses after CEO Elon Musk predicted an “epic Q4,” while adding “knock on wood.”

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Musk also said a “meaningful buyback” was likely in 2023, throwing around a figure of $5 billion to $10 billion as realistic even in a difficult year.

He also made some news by saying that new Tesla owners will get access to the Full-Service Driving beta version, saying the vehicles are now safer with it than without.

Analysts expected Tesla earnings to rise 62% to $1 a share. EPS topped by 5 cents, rising 69% from a year ago. Revenue of $21.454 billion, up 56% from a year ago, fell short of estimates of $22.3 billion.

Automotive gross margin of 27.9% was flat from Q2, though down from 30.5% a year ago. Excluding regulatory credits, auto gross margin was 26.8%, slightly below estimates.

CFRA Research analyst Garrett Nelson said in a note that TSLA stock likely traded lower due to “the lower-quality nature of the beat.” He noted that results were flattered by a lower-than-expected tax rate and lower corporate expenses.

Still, he kept a strong buy on Tesla, though trimming his price target to 340 from 400.

Tesla said cash rose by $2.2 billion from Q2, as $900 million in debt repayments partially offset free cash flow of $3.3 billion. Nelson said that Tesla’s hefty cash balance of $21.1 billion could raise pressure for a stock buyback.

Q3 deliveries, announced on Oct. 2, hit a record 343,830, but fell shy of estimates. However, production of nearly 366,000 vehicles was largely in line. The difference reflected vehicles in transit at the end of the quarter, the company said.

The earnings statement noted that “logistics volatility and supply chain bottlenecks remain immediate challenges, although improving.”

The report comes as TSLA stock has been weighed down by concerns over demand in China, the global economy and Musk’s financing needs for his Twitter (TWTR) deal.

Tesla Production Outlook

Tesla has been targeting a 50% annual increase in deliveries to 1.4 million this year. A key question has been whether the company will walk back that target or pull out all the stops to reach it. On Oct. 10, Morgan Stanley analyst Adam Jonas trimmed his estimate to 1.31 million units from 1.37 million. He also cut his 2023 delivery forecast to 1.8 million from 2 million.

Musk shifted the goal from 50% growth in deliveries to 50% growth in production, suggesting that the mad rush of deliveries at the end of the quarter could fall short.

The earnings release didn’t alter prior language saying the company expects “to achieve 50% average annual growth in vehicle deliveries” over a multiyear horizon.

Tesla ramped up its output in Shanghai to more than 20,000 vehicles per week, up from 17,000. At the same time, waiting lists for Tesla vehicles in China have been getting shorter, so growth may have to rely on exports. Tesla rival BYD, meanwhile, has seen booming EV sales, topping 200,000 in September alone. That includes plug-in hybrids.

BYD (BYDDF), Nio (NIO) and other China EV makers are increasingly competing vs. Tesla vehicles directly with brand-new EVs.

European backlogs also have been coming down. So a big jump in Shanghai exports to Europe may be short-lived, especially with the Berlin plant slowly ramping up output.

Economic concerns are likely to continue to hang over Tesla, with a global recession expected in 2023. It’s unclear the extent to which EV demand can withstand recession.

EV Incentives

Since the Q2 report, passage of the Inflation Reduction Act has improved the intermediate-term financial outlook for Tesla. The law provides $7,500 tax credits for EVs that qualify based on where the vehicles and battery materials are produced. The credit phases out above $300,000 in income for couples.

Incentives for U.S.-based production could amount to $3,100 per vehicle, or $2.8 billion for Tesla, based on its potential 900,000 U.S. production capacity, Wells Fargo analyst Colin Langan wrote in an Oct. 14 note. Langan increased his earnings estimates for Tesla by 33% through 2026 to reflect Inflation Reduction Act incentives.

There remains some uncertainty over which vehicles will qualify for the new U.S. credits.

Incentives for new commercial EVs include tax credits of up to $40,000. Tesla plans to deliver its first Tesla Semi later this year, but has yet to reveal production targets for 2023.

The earnings statement confirmed “the initial phase of Tesla Semi deliveries” will begin in December.

“We are making progress on the industrialization of Cybertruck,” Tesla said. In the conference call, Musk called it “the final lap” for Cybertruck.

Musk has said the Cybertruck will be produced by mid-2023, but the upcoming model has been delayed several times.

TSLA Stock

Tesla stock lost 3.7% in after-hours trading, after initially falling 5%. That followed a 0.8% gain to 222.04 for TSLA stock in the regular session. On Monday, TSLA stock had jumped 7%, after tumbling on Friday to a 15-month low, falling as low as 204.16. Tesla stock is now 46% off its all-time high hit early last November.

Macroeconomic concerns are likely the biggest factor hanging over Tesla, but financing for Musk’s Twitter (TWTR) purchase also has created some uncertainty. One analysis figured that Musk may need to unload an additional $8 billion in TSLA stock.

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