Tesla, The Crown Jewel

The existing market situation may halt the transition and stunt EV growth. Nearly everyone agrees that Tesla (TSLA) is the crown jewel of the auto sector, and the company's growth has an impact on the market for electric vehicles. Wall Street’s most heavily traded stock is expected to post its quarterly earnings today October 19th after the market closes. A company’s earnings are important to follow, as they set the pace for the changes in the stock’s price. A positive surprise might lead to an increase in the stock’s price, while a negative surprise might lead to its decline. Also, estimate adjustments made before a company releases its earnings report can provide insight into the state of the economy throughout the reporting period. This knowledge serves as the basis for all commercial surprise prediction models.

The company has announced lower-than-expected Q3 vehicle deliveries of 343,830 vehicles representing a y-o-y growth of 42% and m-o-m growth of around 35%. Tesla's production has increased, spurred by the recovery in China, a gradual increase in production at the new facilities in Texas, and Berlin, and rising productivity at Fremont’s plant. Despite deliveries in Q3 weighing down by the suspension of production at the company's Shanghai factory, which has the highest installed annual capacity of 750 thousand vehicles, amid Covid-19 restrictions in China, deliveries increased by 27% y-o-y, and Q3 delivery figures actually fell short of the market’s expectations, Tesla might still post greater price realizations and profitability for the period as production scales up at the new plants. Revenues are expected to increase by 63.9% y-o-y basis to reach USD 22.55B and earnings per share of USD 0.97 representing more than a 56.5% y-o-y increase during Q3’22.

Looking at some of the main financial ratios of the company recorded during Q2 2022, we find that the revenue increased by 42% y-o-y but fell by 9.71 % m-o-m. Revenues were positively impacted by the increased average selling price, growth in vehicle deliveries, and growth in other parts of the business. Net Income increased by 98 % to USD 2.259 B y-o-y but fell by 32% m-o-m, and the net profit margin increased by 39.69% y-o-y to 13.4 % compared to the Auto & Truck Manufacturers’ industry’s average of 3.87%. Net profit margin lets Investors determine whether a company's management is making enough money from sales and whether operational expenditures and overhead expenses are in check. The company recorded USD 2.5B operating income in Q2, the highest operating margin in the industry at 14.6% during Q2 showing the progressive profitability of the company due to the lower stock-based compensation expense, higher raw material, commodity, logistics, and expedite costs, higher per unit fixed costs in Shanghai due to shutdowns, negative FX impact, and Bitcoin impairment, according to the company’s press release.

While from a valuation perspective, the price-to-earnings ratio is 532.81 compared to the industry’s average of 254.37, and the price-to-book showed 141.93 compared to the industry’s average of 31.15. Turning to liquidity, the company recorded a quick ratio of 0.87 compared to an industry average of 0.47 meaning that the company may not able to cover its current liabilities with current assets since the quick ratio is less than 1. However, the debt-to-equity ratio has been decreasing over time reaching 0.0867 in Q2            showing that the company is working on its leverage. Finally, the company shows an almost ideal inventory turnover ratio of 7.6 compared to the 7.59 industry average during Q2 meaning that the company sells and restocks at a healthy pace.

Turning to a technical viewpoint, the stock retraced 50% downward from the November 2021 high price of $414 and retested May 2021 support price zone near $208 with diminishing bearish monthly volumes since June 2022. That said, the downward momentum slowed down since w/o July 7th directing the stock to trade in a range between support of USD 206.90 and resistance of USD 314.70. On the weekly trading range view, the stock is rebounding from the USD 206.90 support in an upward corrective move with minimal bullish momentum reflected in volume. The stock broke last week’s USD 227 resistance which if the stock closed above, it would be heading to USD 260 and USD 288. Breaking down the current support level at USD 206.90 would push the stock down to USD 182.6 followed by USD 162.80.

Figure 1: TSLA Weekly Chart| Source: TradingView (October 19th at 11:37 AM UTC +2)




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