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Why Tesla May Deliver a Big Earnings Beat

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Tesla (TSLA - Free Report) had been scheduled to report Q3 earnings during the first week of November, but announced on Monday that they would release the results on Wednesday after the markets close – two weeks earlier than expected.

Shares of Tesla have rallied more than 13% since Friday’s close even as the broad markets have suffered losses.

This will be one of the most important reports in Tesla’s history because it will offer a glimpse into the company’s path to profitability now that they are producing and delivering a significant number of their mass-market Model 3 autos.

Currently the Zacks Consensus Estimates are for a net loss of ($0.53)/share on revenues of $5.67B. The range of estimates is quite wide however. The low estimate for revenues is $5.21B and the highest is $6.28B. The range for net earnings is between a loss of ($1.75)/share all the way to a profit of $0.40/share.

Clearly there are a number of very different opinions about what's about to happen.

Tesla released production and delivery figures for the Model 3 earlier in October. Significantly, they delivered 55,840 Model 3s in the quarter, meeting their own aggressive goals for the first time in recent memory.

If revenues for the Model S and Model X remain relatively constant and assuming an average sales price of $55,000 for the Model 3, total revenue for the quarter would likely exceed $6B.

Gross margins will also be in focus. In Q2, the company reported $3.35B in auto revenue on costs of $2.67B for gross margins of 20.6%. If revenues exceed expectations and automotive margins and operational costs remain relatively constant, it will represent a giant leap toward profitability.

If Tesla has been able to turn all of those Model 3 sales into positive cash flow during the quarter, complaints about “cash burn” and the potential need to raise funds for operations will dissipate.

Even if Tesla fails to report net profits, investors will be looking beyond the raw numbers for a picture of how Tesla got to the result. Q3 was an unusual period for the company and they went to extraordinary measures to dramatically increase production of the Model 3, including adding an additional production line and a third production shift. Executives were reportedly pulling all-nighters and CEO Elon Musk spent some of the period sleeping on the floor of his office.

Those efforts didn’t cost nothing.

Even if expenses did go up during the quarter, it’s possible Tesla will explain that the increase was unique to this period and that they expect to settle into a more conventional manufacturing operation – while still keeping up the increased pace.

All eyes will be on the report after the bell, but even more information will likely emerge during the subsequent conference call. It’s hyperbole to call this a “make or break” quarter, but it’s certainly going to be our best look yet at whether Tesla is on its way to becoming the auto giant so many of the bulls have been hoping for.

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