What to expect from Tesla’s fourth quarter earnings?

Tesla (TSLA) will release its fourth-quarter earnings on Wednesday. What should you expect from the company’s quarterly earnings and what’re analysts forecasting for the share?

The last few years have been phenomenal for Tesla. It gained 740% in 2020 and another 50% in 2021. The rally in TSLA shares began when the company posted a surprise profit in the third quarter of 2019. Till then, the Elon Musk run company had posted a profit in only a handful of quarters.

Tesla has been posting profits

However, in its Q3 2019 earnings release, Tesla said that it expects to be sustainably profitable going forward. Not many believed that the company, which had a dismal profitability record till now, can post consistent profits. However, Tesla delivered on the promise and has since been profitable in all quarters. It was profitable even in the first and second quarters of 2021 when its production facilities were shut due to the COVID-19 related restrictions.

Chip shortage

While critics would argue that the bulk of Tesla’s profitability comes from the sale of carbon credits, it is pretty much a part of the company’s business. However, even critics acknowledge Tesla’s performance on deliveries which came amid several global chip shortages.

The global automotive industry is estimated to have lost over 11 million units of production in 2021. However, it was business as usual for TSLA and it delivered a record number of vehicles in every quarter.

Tesla deliveries

Tesla delivered 308,600 cars in the fourth quarter of 2021 which took its 2021 deliveries to 936,172, a YoY rise of 87%. That’s a spectacular milestone for Tesla and its deliveries in the quarter were way ahead of analysts’ estimates as well as the company’s own guidance. While the company hasn’t provided quantitative guidance, it had said that it expects deliveries to rise at a CAGR in excess of 50% for the next few years. For 2021, it forecasted that the growth would be higher than 50%.

When Tesla releases its earnings this week, markets would watch out for commentary on the 2022 delivery guidance. Wall Street analysts have been upwardly revising their estimates after the company’s stellar fourth-quarter delivery report.

Piper Sandler is bullish

Piper Sandler Analyst Alexander Potter raised his 2022 projections for Tesla’s deliveries. He said, “We are boosting our estimates to reflect better-than-expected Q4 deliveries, as well as a higher estimate for deliveries in 2022 (we now expect 1.53M units, up from 1.38M previously). We’re also nudging our 2022 margin expectations higher, because with strong volume and a rising contribution from software, we suspect Tesla will continue exceeding profitability expectations.”

The brokerage has a $1,300 target on Tesla. However, while it raised the delivery projections, it did not increase the target price citing the increase in bond yields. Deutsche Bank also issued a bullish note on Tesla after the delivery report and said that the company could deliver 1.47 million vehicles in 2022.

Progress on new plants

Also, during the earnings call, Tesla might offer insights into the progress at its Berlin and Texas plants. It is not known whether production at these plants helped propel its deliveries in the fourth quarter.

While there are fears that rising EV competition would dent Tesla’s sales, Potter is not perturbed. He said, “Investors often ask us whether demand for competing EVs might sap Tesla’s sales, but in our view, Tesla’s market share is limited only by the company’s own production capacity (and if 2022 goes as planned, capacity will soon get a big boost).”

Tesla earnings estimates

Analysts polled by TIKR expect TSLA to report revenues of $16.65 billion in the fourth quarter, a YoY rise of 55%. Its adjusted EPS is expected to almost triple to $2.36 during the period. Notably, Tesla has been taking steps to increase profitability and last year it increased vehicle prices multiple times amid rising raw material prices.

Tesla share price forecast

According to the forecast estimates compiled by TipRanks, of the 29 analysts covering Tesla shares, 15 have a buy rating while eight have a hold rating. The remaining six analysts have a sell or equivalent rating. Its average target price of $1,074 is a premium of around 14% over current prices.

Wall Street analysts meanwhile continue to have divergent views on Tesla. While bears like JPMorgan value it at a fraction of the current prices, Cathie Wood of ARK Invest believes the shares would rise three-fold by 2025 under her base case scenario.

Last year, Tesla’s market cap surpassed $1 trillion. It was a new milestone for the company, something which no other automaker has ever achieved. However, Elon Musk also went on a share selling spree which led to pressure on the shares. While the shares recovered thereafter, they have been weak in 2022 amid the sell-off in tech names.

Outlook

TSLA has been trying to increase its revenues from the high margin software business and earlier this month bumped up the FSD (full self-driving) price from $10,000 to $12,000. The company has gradually been raising the prices for its FSD. Here it is worth noting that the nomenclature could be misleading as it is not level 4 autonomous driving and even Tesla advised drivers to keep their hands on the steering all the time even when it is on the Autopilot. There have been multiple instances of crashes involving Autopilot and the US NHTSA is investigating the company.

During the earnings call, TSLA might offer more insights on the FSD price increase. But the company has been quite secretive about the service and does not disclose how many people opt for the FSD along with the vehicle.

Tesla long-term forecast

Over the long term, TSLA is a play on the renewable energy transition. Tesla’s energy business would also add value over the long term and Musk expects it to be as big as the core automotive business. Markets have believed in Musk’s execution capabilities and the company has delivered on multiple fronts including on sustainable profitability.

If Tesla can continue to execute on the business plans, the shares can continue their upwards momentum in the long term as well.