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What Should Investors Do with Tesla Stock Following Q1 Earnings?
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Over the last few years Tesla (TSLA - Free Report) has unequivocally proven the bears wrong. Tesla stock is up a mind-bending 10,000% since 2010, a 43% annualized return. Even after experiencing a -75% correction during 2022, the stock is still up nearly 800% over the last five years.
Tesla has released four new car models since 2015 and erected two international production plants since 2019. In 2020, the EV giant started reporting net profits, which have grown considerably. Tesla achieved all of this while the majority of investors vehemently doubted the electric vehicle company and CEO Elon Musk.
However, while Tesla has undoubtedly changed the world, its most recent quarterly report saw a reversal in key trends. Sales are growing, but margins are shrinking, and an ominous technical pattern on the chart is playing out.
One bad report doesn’t mean that Tesla is going to zero, but this change demonstrates a significant shift which concerns me about TSLA stock in the near-term.
Image Source: Zacks Investment Research
Earnings
On Wednesday, April 19 Tesla reported Q1 earnings that were mostly in line with analysts' expectations. Earnings per share of $0.85 were in line with estimates, and revenue of $23.33 billion just missed estimates of $23.36 billion.
Sales continue to experience strong growth boasting a 24% YoY increase. However, sales did slow QoQ from $21.3 billion in Q4 2022 to $19.9 billion Q1 2023. Additionally, earnings are down -20% YoY and profitability suffered as well.
After exploding in 2020, profits have clearly stagnated, and begun to roll over. Operating margins have shrunk rapidly from 19.2% in Q1 2022 and 16% in Q4 2022, to just 11.2% in Q1 2023. This huge decline in profitability is a direct result of cutting the price of Tesla vehicles, which was done to remain competitive internationally.
CEO Musk confidently claimed that “It’s better to ship a large number of cars at a lower margin, and subsequently, harvest that margin in the future as we perfect autonomy.” Although it doesn’t seem investors agree.
Image Source: Zacks Investment Research
The juxtaposition of growing sales, and shrinking profits succinctly describes my expectations. Long-term, Tesla will continue to dominate the electric vehicle industry, while vertically integrating and continuously innovating. But shrinking cash flows, and potential macroeconomic headwinds make for a precarious near-term scenario.
Unfortunately for Tesla, investors today have become laser focused on stocks with growing profits. If the economy does enter a recession Tesla, with a smaller cash pile, will be in a shaky situation.
Image Source: Tesla Investor Relations
Technical Pattern
Tesla started 2023 extremely strong nearly doubling in the first two months, but there hasn’t been any follow through. Since then, the stock has carved out a wide consolidation, confounding both bull and bears. But with earnings as a catalyst TSLA stock has now decisively broken down from the pattern.
Using the $169 breakdown level as a line in the sand, there looks like more downside coming soon. The first target is $140, which would be a gap fill, and below that $120 looks possible.
Image Source: TradingView
Bottom Line
Even though Tesla’s valuation has come down to much more reasonable levels, at 50x earnings today, there is still room for it to drop. Tesla, even with strong sales is beginning to see that growth slow. It is clear that Tesla is becoming a more mature business and thus the valuation can compress further.
Image Source: Tesla Investor Relations
The combination of falling profitability, slowing sales growth, economic uncertainty, and a bearish technical pattern make Tesla a stock that investors should take a “wait and see” approach. At lower levels, Tesla is a much more compelling investment.
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What Should Investors Do with Tesla Stock Following Q1 Earnings?
Over the last few years Tesla (TSLA - Free Report) has unequivocally proven the bears wrong. Tesla stock is up a mind-bending 10,000% since 2010, a 43% annualized return. Even after experiencing a -75% correction during 2022, the stock is still up nearly 800% over the last five years.
Tesla has released four new car models since 2015 and erected two international production plants since 2019. In 2020, the EV giant started reporting net profits, which have grown considerably. Tesla achieved all of this while the majority of investors vehemently doubted the electric vehicle company and CEO Elon Musk.
However, while Tesla has undoubtedly changed the world, its most recent quarterly report saw a reversal in key trends. Sales are growing, but margins are shrinking, and an ominous technical pattern on the chart is playing out.
One bad report doesn’t mean that Tesla is going to zero, but this change demonstrates a significant shift which concerns me about TSLA stock in the near-term.
Image Source: Zacks Investment Research
Earnings
On Wednesday, April 19 Tesla reported Q1 earnings that were mostly in line with analysts' expectations. Earnings per share of $0.85 were in line with estimates, and revenue of $23.33 billion just missed estimates of $23.36 billion.
Sales continue to experience strong growth boasting a 24% YoY increase. However, sales did slow QoQ from $21.3 billion in Q4 2022 to $19.9 billion Q1 2023. Additionally, earnings are down -20% YoY and profitability suffered as well.
After exploding in 2020, profits have clearly stagnated, and begun to roll over. Operating margins have shrunk rapidly from 19.2% in Q1 2022 and 16% in Q4 2022, to just 11.2% in Q1 2023. This huge decline in profitability is a direct result of cutting the price of Tesla vehicles, which was done to remain competitive internationally.
CEO Musk confidently claimed that “It’s better to ship a large number of cars at a lower margin, and subsequently, harvest that margin in the future as we perfect autonomy.” Although it doesn’t seem investors agree.
Image Source: Zacks Investment Research
The juxtaposition of growing sales, and shrinking profits succinctly describes my expectations. Long-term, Tesla will continue to dominate the electric vehicle industry, while vertically integrating and continuously innovating. But shrinking cash flows, and potential macroeconomic headwinds make for a precarious near-term scenario.
Unfortunately for Tesla, investors today have become laser focused on stocks with growing profits. If the economy does enter a recession Tesla, with a smaller cash pile, will be in a shaky situation.
Image Source: Tesla Investor Relations
Technical Pattern
Tesla started 2023 extremely strong nearly doubling in the first two months, but there hasn’t been any follow through. Since then, the stock has carved out a wide consolidation, confounding both bull and bears. But with earnings as a catalyst TSLA stock has now decisively broken down from the pattern.
Using the $169 breakdown level as a line in the sand, there looks like more downside coming soon. The first target is $140, which would be a gap fill, and below that $120 looks possible.
Image Source: TradingView
Bottom Line
Even though Tesla’s valuation has come down to much more reasonable levels, at 50x earnings today, there is still room for it to drop. Tesla, even with strong sales is beginning to see that growth slow. It is clear that Tesla is becoming a more mature business and thus the valuation can compress further.
Image Source: Tesla Investor Relations
The combination of falling profitability, slowing sales growth, economic uncertainty, and a bearish technical pattern make Tesla a stock that investors should take a “wait and see” approach. At lower levels, Tesla is a much more compelling investment.