Tesla Stock Q2 Earnings Preview: EV Behemoth Must Live Up To Lofty Investor Expectations

Summary:

• On the back of the first Cybertruck rolling off of the production line at Gigafactory Texas, Tesla’s stock has broken past the $280 level ahead of a pivotal earnings report.
• In this note, we shall preview Tesla’s upcoming Q2 2023 quarterly report and re-evaluate our positioning in TSLA stock.
• Without further ado, let’s jump straight in!

Introduction

Since the release of its Q2 Vehicle Production and Delivery report on 2nd July 2023, Tesla’s (NASDAQ:TSLA) stock has tacked on another ~11% to its incredible year-to-date run, with the EV-giant surpassing Q2 delivery estimates to achieve a new all-time high for quarterly vehicle deliveries.

In Tesla Stock: Bull Run Or Bull Trap?, we discussed the logic and staying power of this ongoing rally in TSLA stock using fundamental, quantitative, technical, and valuation analysis. After gaining ~170% YTD, Tesla stock has become “Overvalued” as per TQI Valuation Model, and it is once again looking expensive on a relative basis compared to mega-cap tech peers. While Tesla’s quant factor grades remain unsupportive, technical momentum is looking strong, with TSLA seemingly breaking out of the key $280 technical level in yesterday’s trading session.

If you have followed my work on Tesla, you already know the importance of this technical level, but here’s what I said in my previous note:

Since then [May 2023], Tesla broke out to the upside above that key head-and-shoulders neckline level of $215 and rallied up to ~$280 before pulling back down to the $250s where it sits right now.

While it is getting close, Tesla’s stock is not quite in overbought territory, with an RSI of 65. As long as TSLA trades above the straight [black] and slanted [blue] necklines of the H&S pattern, I hold a constructive [bullish] view on Tesla’s technical chart. For a continuation of the rally, I would like to see a bullish breakout above recent highs at ~$280, which is also the bearish trendline [red dotted line] that connects previous local tops.

At this moment in time, I am not sure if Tesla’s breakout is real or if it is a bull trap. And until Tesla breaks above $280 or below $215, I am going to hold the fort [keep my existing long position in place]. From a technical perspective, Tesla is currently in a no-trade zone [$215 to $280].

With Tesla having decisively broken above $280, I can see TSLA heading higher from here in the event of an earnings beat on Wednesday (19th July 2023). And in my view, the ongoing rally in Tesla could extend to ~$360-400 in the coming months if we do eventually end up with a no-landing or soft-landing for the economy.

Mr. Market is clearly bullish on Tesla here; however, investors must remain cognizant that Monday’s jump in TSLA stock was driven by news of the first Cybertruck rolling off the production line at Gigafactory Texas.

While Cybertruck is undoubtedly an exciting product, it is unlikely to move the needle for Tesla in the near term. Hence, Tesla’s pre-earnings breakout could yet be a false signal (bull trap).

In today’s note, we will preview Tesla’s upcoming quarterly results and re-evaluate our positioning in the stock.

What To Expect From Tesla’s Q2 2023 Report?

Heading into the Q2 2023 earnings report on 19th July 2023, Tesla is expected to post revenues and Normalized EPS of $24.7B (up 46% y/y) and $0.82 (up 8% y/y), respectively.

While Tesla reported a slight miss on the top line in Q1, the EV giant has a robust history of outperforming consensus street expectations. And given (already announced) better-than-expected vehicle delivery numbers for Q2, Tesla is likely to surpass street estimates for revenue this quarter.

In Q2, Tesla Inc. delivered a record ~466.1K vehicles [vs. the consensus estimate of ~446K vehicles]. Under the current macroeconomic conditions, Tesla’s Q2 vehicle delivery growth of +83% y/y is truly astounding despite easier y/y comps due to China’s COVID lockdowns in Q2 2022.

In recent quarters, we have discussed Tesla’s inventory build, and this trend continued in Q2 2023, with Tesla once again producing more vehicles than it delivered during the quarter. In Q2, Tesla produced a record ~480K vehicles, and for now, it looks well on track to meet (and exceed) its 2023 production goal of ~1.8M vehicles. While Elon Musk (Tesla’s CEO) has previously dismissed all inventory and demand concerns, I don’t like this inventory build-up one bit. In the event of a recession (hard landing), demand for autos will likely drop drastically. And if inventory levels keep rising, i.e., Tesla keeps overproducing, then more price cuts could be needed to clear excess inventory (fewer profits).

Yes, Tesla has maintained unit volume growth through this challenging macroeconomic environment; however, I would like to highlight that Tesla is compromising on margins to drive volumes. As per a recent report from SeekingAlpha, Tesla’s gross margins are set to decline to 18.7% in Q2 2023 from 19.3% in Q1 2023 due to price cuts implemented during this quarter. Given ongoing margin compression, I am not overly optimistic about Tesla’s prospects of delivering a significant bottom-line beat on Wednesday. That said, I am curious to learn about management’s outlook on future margins.

Over the last three months, analysts have slightly raised their revenue and earnings estimates for Q2 2023; however, these estimates are still considerably lower than where they were six months ago. Now, Tesla could easily “beat and raise” on these lowly street estimates, but investor expectations have increased significantly after the 170%+ YTD run in TSLA stock. Hence, any sort of disappointment from Tesla could render the Q2 report a “sell the news” event for the stock.

Tesla’s energy business was a bright spot in its Q1 earnings report, and I continue to believe that this piece of TSLA’s business is severely underappreciated in the investing world. With economic conditions set to worsen over the coming months, Tesla’s EV business could under-deliver on consensus projections in 2023-24. However, Tesla’s energy storage business is seeing immense demand, and this segment could significantly boost overall financial performance as Tesla’s Lathrop facility scales Megapack BESS production throughout 2023. And this is something I’ll be following closely while reading Tesla’s Q2 earnings report.

Re-evaluating TQI’s Stance On Tesla, Inc.

At my investing group, The Quantamental Investor, we added Tesla aggressively in the low to mid $100s in late 2022. As you may know, I was unequivocally bullish on TSLA stock earlier this year. However, Tesla’s Q1 earnings report [worse-than-expected margin compression in particular] and a rapid move up in the stock forced me to change my stance on TSLA to “Neutral/Hold” back in April 2023.

Heading into a pivotal Q2 earnings report, I remain deeply concerned about Musk’s recession playbook – “selling cars at/near cost to generate profits from FSD in the future”. For the sake of brevity, we won’t go into the details of Musk’s recession playbook today, but the grave risks of this playbook were previously discussed in this research note:

• Tesla Stock: An Asymmetric Buying Opportunity Arises Out Of Insider Selling, Demand Concerns, And A Scary Recession Playbook

Deep price discounts and $7,500 EV tax credits (from Inflation Reduction Act) have enabled Tesla to beat consensus delivery estimates for Q2 2023; however, the near-term business outlook for the EV giant still remains unclear due to the heightened probability of an economic recession.

While I don’t know when the recession will hit the US economy or if we are in one already, I do believe we will experience a hard landing due to an impending credit crunch (a result of the regional banking crisis) and FED’s insistence on “higher interest rates for longer” policy. Leading economic indicators and a deeply inverted yield curve are screaming – “Recession Ahead”. And during past recessions, auto sales in the US (and globally) have declined precipitously. Hence, I think it is fair to assume that auto sales will come under significant pressure in this upcoming recession too.

Yes, low electric vehicle penetration levels and strong EV adoption trends could enable Tesla to maintain high volumes during a recession at the cost of margins; however, it will be a miracle if Tesla can maintain its current growth rate through an economic downturn. Furthermore, margin pressure is already killing Tesla’s free cash flow generation, which fell to $440M in Q1 2023 (vs. estimate of ~$3B).

Going into Q2 earnings, Tesla stock has rallied up to $290. However, with a forward P/E of ~82x, Tesla is now trading at a significant premium relative to its big tech peers. While Tesla bulls may argue that TSLA stock deserves a premium due to faster sales growth at the EV giant and potential FSD-driven margin expansion, bears would contend that Tesla is a CAPEX-intensive manufacturing business with far lower profit margins compared to other big tech companies. In my view, both bulls and bears have a defensible argument.

More importantly, TSLA stock is looking significantly overvalued on an absolute basis. Here’s my latest Tesla stock valuation:

Using a 5-yr modeling period and somewhat aggressive assumptions, we deduced a ~$180 fair value estimate for Tesla. At its current price of $290, Tesla has a downside of -38% to its fair value.

Assuming a base case exit multiple of ~25x P/FCF, TSLA could be trading at ~$436 per share five years from now. At this estimated future price, Tesla would generate a 5-yr CAGR return of ~8.5%, which is considerably lower than my investment hurdle rate of 15%. Hence, I think TSLA’s long-term risk/reward is unfavorable for bulls at this time, with the stock having gotten too far, too fast, above its fair value.

Concluding Thoughts

From a technical perspective, Tesla has strong momentum, and now that it has broken above the $280 level, it could be headed even higher in the coming weeks and months, as shared in today’s article.

In my previous note on Tesla, I shared a playbook for managing our long position in TSLA stock:

If Tesla slides back to ~$180 without significant deterioration in the business’s financial performance, I would re-start accumulation and add more TSLA to my long position. On the flip side, if Tesla’s valuation gets out of whack with reality in the next 6-12 months (downside risk rises from ~30% to, say, ~50-60% [TSLA gets to $360-400+]), I would happily take more gains here by gradually selling out of my long position in Tesla.

And going into Tesla’s Q2 earnings report, I plan to abide by this playbook. Despite a clear upside breakout in TSLA stock in yesterday’s session, I continue to maintain a “Neutral/Hold” rating on Tesla heading into Wednesday’s earnings release due to unfavorable risk/reward dynamics.

Key Takeaway: I rate Tesla “Neutral/Hold” at $290 per share.

If you are interested in reading more of my work on Tesla, head over to:

• Ahan Vashi’s SA Research Coverage On Tesla Inc.

Thank you for reading, and happy investing. If you have any questions, thoughts, and/or concerns, please share them in the comments section below.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of TSLA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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