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Wall Street shifts focus back to Tesla's core auto business ahead of earnings as robotaxi hype fades

Several cars in a row at a Tesla factory.
San Francisco Chronicle/Hearst Newspapers via Getty Images
  • Tesla investors will be watching profit margins when the company reports earnings on Wednesday.

  • Tesla stock is down by 13% this year, compared with the S&P 500's 22% gain.

  • Some analysts expect Tesla's earnings to signal a turning point, while others see more pain ahead.

Tesla will report third-quarter earnings results after the market close on Wednesday, and Wall Street will be focused on the company's core auto business.

That's a shift from the recent hype surrounding Tesla's robotaxi, which is still years away from hitting the market.

At the end of the day, Tesla gets the bulk of its revenue and profits from selling cars, and Wall Street wants to see the company return to growth mode in its core auto business.

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The company is on track to deliver about the same number of cars this year as it did in 2023, and its profit margins have steadily deteriorated because of aggressive price cuts this year.

Tesla stock is down by 13% in the year to date, compared with a 22% gain for the S&P 500 over the same period.

However, some analysts on Wall Street expect the third-quarter earnings print to be a sign that the worst is behind Tesla.

Here's what Wall Street expects from Tesla's earnings report.

Barclays: 'Back to fundamentals'

"With Tesla's Robotaxi Day passed, we believe the focus for Tesla at least for now shifts back to fundamentals," the Barclays analyst Dan Levy said in a note last week.

Levy expects Tesla to beat earnings estimates, predicting earnings per share of $0.68 versus the consensus of about $0.60.

"After a run of sharply negative revisions to earnings estimates, Tesla estimates have largely stabilized," Levy said. "Volumes are expected to be flat y/y, margins have troughed and are set to improve, reg credit revenue can be a solid boost as other OEMs rely on Tesla to achieve compliance, Tesla Energy is generating solid growth, and opex may trend lower for now as Tesla realizes the cost saves of headcount reductions."

Those points, along with the fact that Tesla stock sold off after its robotaxi event, give Levy confidence that the company's third-quarter earnings will be a catalyst for the stock.

Levy said that aside from discussion of the earnings results and guidance on its conference call, any commentary about plans for a lower-cost vehicle could move the stock.

"We also wouldn't dismiss the notion that Tesla could forgo a 'Model 2.5,' instead focusing its resources on rolling out the AV strategy," Levy said, referring to the firm's autonomous-vehicle ambitions. He added that investors would treat such a development as a negative for the stock.

Barclays rates Tesla at "equal weight" with a $220 price target.

Wells Fargo: Volume now, margin pain later

After Tesla reported disappointing third-quarter deliveries this month, Wells Fargo expects the company to make up for the shortfall in sales by offering "aggressive finance promos globally," the analyst Colin Langan said in a note last week.

"We est. the Q3 promotions are equivalent to ~8% lower effective px cut," Langan said, adding that he expects the company to miss Wall Street's third-quarter earnings estimates.

Langan predicted that Tesla's automotive gross margin excluding credits would be 13.6% in the third quarter, down from 14.6% in the previous quarter.

Wells Fargo rates Tesla at "underweight" with a $120 price target.

Wedbush: 'Margins will be a key focus'

The Wedbush analyst Dan Ives is staying bullish on Tesla stock, arguing that the company should show a return to growth in its third-quarter earnings call and forward guidance.

"We expect generally in-line 3Q headline numbers with some slight upside likely on the margins front showing a bottoming on this key metric," Ives said in a recent note.

Ives argued that Tesla should be able to deliver 1.8 million vehicles in 2024 and that the figure should rise to more than 2 million vehicles in 2025.

But perhaps more important than vehicle deliveries for Wall Street is Tesla's profit margins.

"Margins will be a key focus on the conference call," Ives said.

He added that investors would want to see this metric in the high teens for the third and fourth quarters and heading toward 20% in 2025. That should soothe fears about further price cuts and convince investors that better days are ahead, Ives said.

Wedbush rates Tesla at "outperform" with a $300 price target.

Bloomberg Intelligence: 'More pain to come'

Tesla's aggressive price cuts of 20% over the past year, combined with a plunge in trade-in values for Tesla vehicles, suggest there's "more pain to come," said Joel Levington, a director of credit research at Bloomberg Intelligence.

Levington argued in a note on Tuesday that Tesla's price declines were putting its luxury brand identity at risk.

Levington added that with Tesla facing more competition, it needs to release a lower-cost vehicle.

"Tesla is poised to give up share as rivals from Acura to Volvo create a tsunami of new EV products that will flood the markets, making the lower-cost Model 2 and updates of its data product line critical," Levington said.

Read the original article on Business Insider