The American electric carmaker Tesla is set to release its fourth-quarter earnings on January 29. Lately, TSLA has been in the news as its stock has rallied to record highs. A recent price rally in Tesla stock has made it the most valuable US automaker with its market value soaring over $ 100 billion. In this article, we’ll take a quick look at Tesla’s recent quarterly financial performance along with Wall Street analysts’ estimates for Tesla’s Q4 2019 earnings report.

Tesla Q4 2019 earnings preview

According to the latest Wall Street analysts’ estimates compiled by Refinitiv, Tesla is expected to report $1.72 adjusted earnings per share in the fourth quarter of 2019. This estimate is lower than the company’s adjusted EPS of $1.86 in the third quarter and $1.93 in the fourth quarter of 2018.

While the surveyed analysts expect Tesla to be profitable in the fourth quarter, they estimate the company to report a $0.45 adjusted net loss in the full year 2019.

What could help Tesla to report profitability in Q4 2019?

Previously in its third-quarter earnings presentation, Tesla mentioned that it expects a positive net income on GAAP (generally accepted accounting principles) basis going forward. It also noted that there could be some “possible temporary exceptions,” especially when the company launches or ramps for the production of a new vehicle.

Nonetheless, Tesla’s solid fourth-quarter car deliveries could help it achieve profitability in the quarter. In Q4 2019, Tesla delivered 112,000 car units to its customers, reflecting 23.1% YoY (year over year) and 15.2% sequential gains. A solid 46.1% YoY increase in its Model 3 deliveries in the quarter helped the company register solid overall car deliveries gains.

These stronger car deliveries, along with customer deposits for new car reservations, could drive Tesla towards profitability in the fourth quarter of 2019.

Revenue expectations

Interestingly, analysts expect Tesla’s fourth-quarter revenue to drop by 2.9% on a YoY basis to about $7 billion despite higher car deliveries. In Q4 2019, Model 3 made up about 83% of the company’s total car deliveries as compared to only 70% in Q4 2018.

Note that the Tesla Model 3 car is priced much lower than the Tesla Model S and X. Hence, a higher contribution of Model 3 cars in Tesla’s total deliveries could hurt its revenue in Q4 2019.

If Tesla manages to meet Wall Street’s revenue expectations in Q4 2019, then its quarterly revenue would cross $7 billion benchmark for the second time after Q4 2018.

Profit margin expectations

Previously in the third quarter of 2019, Tesla reported $1.2 billion gross profit with an 18.9% gross margin on a GAAP basis. It was better than its gross margin of 14.5% in Q2 2019 but worse than 22.3% in Q3 2018. The company said that higher fixed costs – required to improve operating efficiency and continued vehicle production ramp-up process affected its gross margin for the quarter.

In Q4 2019, analysts estimate TSLA to report an 18.7% gross margin with $1.29 billion gross profit.

Tesla’s profit margin from Model 3 cars tend to be much lower as compared to its margin from Model S and X. Higher deliveries of low margin Model 3 cars and a possible increase in the company’s fixed cost to further increase car production is likely to affect its profitability.

On the positive side, as its production continues to improve, better economies of scale are likely to help Tesla offset the negative impact of higher fixed costs on its profitability.

Key factors to watch in Tesla’s Q4 2019 earnings

In my opinion, investors should keep a close eye on the following key factors in Tesla’s fourth-quarter earnings.

The car production schedule for 2020

Currently, Tesla produces only three-car models, including Model 3, Model S, and X. However, the company has many other vehicles such as Tesla Semi, the new version of Tesla Roadster, Model Y, and Tesla Cybertruck in the pipeline.

In September 2019, Tesla CEO Elon Musk’s one of the tweets suggested that the company will prioritize a new Model S variant called “Model S Plaid” in 2020 and delay the production of the new variant of Tesla Roadster.

https://twitter.com/elonmusk/status/1173992505672519680

During Tesla’s Q4 2019 earnings event, investors can expect the company to reveal its 2020 car production plans in detail. These important details would give a better idea about the company’s future growth plans, which should also have an impact on its profit margins.

2020 car deliveries guidance

Based on the preliminary data that the company has provided, Tesla’s car deliveries rose by 59.7% in the full-year 2019 to 367,561 units. During the year, the company produced 365,232 cars.

During Tesla’s Q4 2019 event, investors should keep a close eye on its car 2020 production and delivery guidance. A solid car delivery guidance is likely to push Tesla stock even higher, which is already trading near its record highs.

Updates on operating efficiency

TSLA’s update on operating efficiency should also remain in focus as it’s directly linked to its overall business profitability. In the fourth quarter of 2019, Tesla also started producing cars at its Shanghai-based Gigafactory. Therefore, investors should pay attention to the updates related to any improvements in the company’s operating efficiency to set more realistic expectations from the coming few quarters.

Tesla valuation and analysts’ ratings

A recent price rally in Tesla stock has made its valuation extremely high as compared to other automakers. As of January 24, 2020, Tesla’s PE ratio was 95.2x based on its the next 12-month earnings estimates. At the same time, forward PE multiples of General Motors (GM) and Ford Motor Company (F) were 5.5x and 7.2x, respectively.

Despite recent significant improvements in its financials, it’s not easy to justify Tesla’s extremely high valuation at the moment. However, we shouldn’t forget that it is TSLA’s huge future growth potential – unlike other automakers, which could be keeping investors and analysts optimistic and driving its valuation higher.

Before Tesla’s Q4 2019 earnings event, only nine Wall Street analysts out of total 34 are recommending a buy on its stock. The remaining 10 and 15 analysts are recommending hold and sell on the stock, respectively.

Will Tesla Q4 2019 earnings drive its stock even higher?

In Q4 2019, Tesla stock witnessed a massive price rally and rose by 73.7%. These gains were significantly better than 8.5% and 12.2% rise in the S&P 500 index and the NASDAQ Composite Index, respectively. Tesla’s peers, such as General Motors and Ford, traded on a mixed note in the fourth quarter. While GM stock fell by 2.3%, Ford stock inched up by only 1.5%.

Tesla stock’s solid gains are continuing this year as well. As of January 24, it has surged up by nearly 37%, while GM and Ford have fallen by 4.7% and 1.7%, respectively. In January 2020, so far, the S&P 500 and NASDAQ Composite have gained 2.9% and 4.8%, respectively.

Some may argue that Tesla stock has already seen gains beyond expectations in the last couple of months. However, the stock rally may extend further if the company’s fourth-quarter results and especially its 2020 guidance manages to impress investors.