Can Tesla’s earnings reawaken its stock? - Stock Market News



The world’s largest electric carmaker will release its quarterly results on Monday after markets close. This year has been difficult for Tesla shareholders so far, but that follows an incredible rally last year which saw the company’s valuation go through the roof. While the future remains bright, the risk-to-reward profile doesn’t look very attractive here. 

Executing

With a high valuation comes high execution risk, but luckily Tesla has been delivering on that front lately. The company recently said it delivered a total of 206k vehicles during the second quarter, more than double what it delivered in the same quarter last year. 

The problem is that virtually all of those were Models 3 and Y, which are the cheaper and lower-profit models. Tesla raised the prices of those cars several times during the quarter in small increments, which it blamed on higher costs of production arising from supply chain problems and chip shortages.  

Strong quarter

For the quarter that ended in June, the carmaker is projected to have earned $11.3bn in revenue, which would represent a whopping 86% increase from the same quarter last year. On the profit side, analysts expect earnings per share to clock in at $0.97. This means Tesla is barely profitable, but it’s still a 120% jump from last year. 

The initial market reaction will depend on whether the actual numbers are stronger or weaker than expectations. Whether that reaction lasts though, will come down to the guidance by management for the next quarters. 

CEO Elon Musk will probably be questioned on how his company is handling the chip shortage, how quickly the new version of the Full Self Driving software will be rolled out, and how Tesla plans to cope with the increasing competition in the industry. 

Another topic that could grab headlines is Musk’s view on cryptocurrencies and whether the company’s Bitcoin holdings held back profits, following the sharp decline in prices over the quarter. Admittedly, this is a relatively small portion of Tesla’s overall cash, but it matters for market sentiment. 

Big picture and risks

Overall, Tesla seems positioned for great things. It is at the forefront of the global shift towards electric vehicles, it has revolutionized the battery industry, and it will probably be the leading autonomous driving company. Its self-driving software is just miles ahead of the competition and improving quickly. 

But there are risks. One of them is competition from traditional carmakers like Ford or Volkswagen, who have started to roll out their own electric cars. 

The other risk is the stock’s valuation. It has corrected a little lately, but it is still extremely elevated. This means that a lot of good news is already baked into the cake, which is a double-edged sword. 

On the bright side, markets are pricing in stellar growth for several years, showing confidence in the company’s ability to execute. However, when a stock is priced for perfection, any piece of bad news can have a massive impact as expectations for tremendous growth are dialed back. 

In other words, the risk-to-reward profile isn’t really attractive here. If Tesla executes flawlessly and grows to dominate the auto sector, that simply validates what is already priced into the stock. But if it doesn’t, the pain could be tremendous. 

Taking a technical look at Tesla shares, in case of an earnings disappointment or worrisome guidance, the market could fall to test the recent lows around 620. A downside break would open the door towards the 545 zone. 

On the flipside, if the company delivers stellar results, the bulls could push the price towards the 700 region. If they manage to violate it, their next target could be the April highs of 780. 

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