Tesla shares run out of juice before earnings - Stock Market News

The world’s leading electric carmaker will report its quarterly earnings on Wednesday, after the US market close. Earnings and revenue are both expected to have improved dramatically thanks to record car deliveries. That said, traders don’t seem very impressed as Tesla shares are trading 17% lower this year. Are valuation concerns starting to bite now that interest rates are rising? 

Record deliveries

Tesla closed 2021 with a bang, announcing a couple of weeks ago that it had delivered a record-breaking 308k electric vehicles during the final quarter of the year. That was a solid 70% increase from the same period last year and well above analyst estimates, confirming that business is booming. 

Almost 97% of those deliveries were for Model 3 and Model Y. These are the cheaper and more affordable editions, suggesting that the company continues to pivot away from luxury customers and towards the middle classes. 

Overall, this is quite impressive considering that this year was marked by supply disruptions and chip shortages. Beyond growing sales at a healthy clip, Tesla also opened two new factories in Texas and Berlin, allowing the company to scale its operations and therefore raise its profit margins moving forward. 

Strong quarter expected

As a result, Tesla is expected to report earnings per share of $1.59 for the final quarter of 2021, more than six times what it reported during the same quarter last year. Revenue is projected to have risen by almost 52% over the same period to reach $16.3 billion. 

It is worth noting that the company has a mixed track record when it comes to beating earnings estimates, having done so in two of the last four quarters and four of the last eight. 

Whether the numbers are stronger or weaker than expected will likely decide the initial market reaction. But whether that reaction persists or reverses could depend on the subsequent earnings call, where CEO Elon Musk is expected to provide an update on the roadmap of various products. 

Taking a technical look at Tesla shares, a pullback could encounter initial resistance around the 980 region. 

On the upside, the first real battle for the bulls may be the 1,115 zone. 

Is all the good news priced in? 

It is clear that Tesla as a company is doing better and better. And yet, the stock is down by a whopping 14% this year. It seems that investors don’t really share this excitement, which most likely boils down to valuation. 

Remember that Tesla went on a spectacular bull run, with the share price rising ten-fold over the last couple of years. During that period the stock essentially went from being valued as a car manufacturer to being priced as a tech business, thanks to its revolutionary batteries and self-driving software. 

Even though earnings and revenues are growing quickly, the valuation is still pretty scary. The 12-month forward price-to-earnings ratio currently stands at an eye-watering 107.4x, with a price-to-sales ratio of 13.2x. Both are extremely elevated. On the bright side, this is a sign of confidence. It means investors are pricing in a lot of future growth for Tesla. 

But it can also be a curse. When interest rates rise, the stocks that typically get smashed the hardest are those with stretched valuations. That’s because investors aren’t willing to take on the risk or stomach the volatility of high-growth stocks, if bonds suddenly start paying a positive return. 

With the Fed currently expected to raise interest rates in every single quarter of this year and shrink its balance sheet, this leaves Tesla vulnerable to an even deeper drawdown as financial conditions tighten. There’s also the risk of intensifying competition in the electric vehicle space, although Tesla’s brand is likely strong enough to withstand that by now. 

All told, this seems like a classic case of markets having run too far ahead of fundamentals, setting the stage for some payback now that the Fed is taking away the punchbowl. That said, this only argues for a correction from elevated levels, not a crash. As long as earnings keep growing so quickly, Tesla can grow into its valuation. 

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