Will Tesla's (TSLA) Model 3 Bolster Q3 Earnings?

Christopher Vargas

Tesla TSLA is set to report its third quarter results after the closing bell Wednesday, October 23. The electric car company has had a rough year, as shares are down more than 23% in 2019 and significantly lagging behind the auto market’s 8.1% rise. Investors are skeptical whether or not the company’s Model 3 will be able to become the product that can finally help the company become consistently profitable.

The lower price of the Model 3 vehicle has some investors believing it will be the X factor for Tesla, but others believe that the Model 3 can cause Tesla’s gross profit margin to contract and ultimately hinder the automaker’s bottom-line. Let’s take a closer look at the company and how they might come out of the gates in Q3.

Do Bullish Investors Still Have a Case?

Tesla has a fanbase that thoroughly believes in the company’s products and potential for the future as well as the sometimes-unorthodox behavior of its innovative CEO, Elon Musk. While the electric car company seems to always retain its loyal and avid fan base, do the bullish Tesla investors have a good reason for their optimism?

While Tesla didn’t reach their 100,000-car delivery target, the 96,000 cars they did deliver in Q3 was a new quarterly record for the automaker. 96,000 is an impressive number for a company that typically needs to work with a niche consumer market in a capital-intensive industry. Despite the challenges stacked against the company, bigger automakers like Ford F and General Motors GM are trying to catch up to Tesla in the electric vehicle market.

Some investors believe that Tesla will be able to flex its premium brand and report a 25% gross profit margin on its automotive business. This target is impressive because it's about the same gross profit margin that Tesla had on its higher-priced Model S and X sales before Model 3 production and deliveries ramped up.

Outlook

If Tesla can reach this target and sustain it while the Model 3 grows and becomes a larger part of the firm’s total revenue, then it would indicate that the production of the Model 3 is seeing improved efficiency.  However, gross profit margin has moved in the wrong direction lately. The company’s automotive gross margin peaked in the third quarter of 2018 at 25.8%, it decreased to 24.3% in Q4, 20.2% in Q1, and 18.9% in Q2. This can indicate that Tesla's gross margin is spiraling downwards as Model 3 deliveries increase.

Our consensus Q3 estimates forecast Tesla’s bottom-line to plummet 104.14% to a loss of $0.12 per share while sales slip 3.25% to $6.6 billion. The services and energy generation and storage segments are expected to make respective gains of 87.2% and 8.58%. Total automotive revenue is projected to fall 9.76% to $5.5 billion.

Looking ahead to Tesla’s full fiscal 2019 figures, our estimates forecast the electric car company to see earnings crater 127.82% to a loss of $3.03 per share while sales grow 15.3% to $24.75 billion. The services segment is expected to surge 75.3% to $2.44 billion and the energy generation and storage segment is anticipated to reach $1.56 billion. Total automotive revenue is expected to come in at $20.9 billion for a 12.9% gain.

Takeaway

Tesla is expected to make gains in total sales, but our estimates predict for their profitability issues to continue through the current fiscal year. The company’s recent struggles with gross profit margin should be something that investors may want to closely monitor this time around as it can indicate whether or not Tesla can reach the economies of scale it thought it could achieve by slashing the Model 3’s price.

However, Tesla has become almost synonymous with the electric vehicle, which has caused bullish investors to drive the stock higher and making Tesla a company that continues to be difficult to gauge.

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