Earnings Season Strategy for Star Companies | What are the key factors in Tesla's earnings report?

As we enter July, it's time for the US stock earnings season again. Most US-listed companies will release their latest earnings reports over the next month or so. The earnings reports of major US stock companies are particularly crucial as they tug at the heartstrings of many investors,as the quality of their earnings not only affects their own stock prices but may even influence the overall trend of the US stock market.After all, the upward trend of the US stock market this year has largely been driven by a few giant companies such as Apple, Google, NVIDIA, and Tesla.

So, how should we analyze the earnings reports of these giant companies? These companies have different business models, so naturally, the focus when reviewing their earnings reports varies. From Futubull’s earnings calendar, we know that the first among these giants to release its report will be$Tesla (TSLA.US)$, companyscheduled to announce its Q2 2023 financial results after the US stock market closes on July 19.

Before we get into that, let's review and take a look at Tesla's earnings reportto identify the key factors that could significantly impact the stock price.

1. Changes in sales volume

First of all, for new energy vehicle companies,the most important metric to observe is always total deliveries, or sales volume.This is especially true for a leading company like Tesla. Why is that?

First, the higher the sales, the larger the market share, and the stronger the brand presence among consumers.

Second, an increase in sales will directly reflect in the revenue shown in the financial report. Historically, Tesla’s rapid earnings growth has been primarily driven by new car sales.

Third, higher sales lead to stronger economies of scale and better profit margins. This was more noticeable during Tesla’s early development stage. Currently, Tesla’s sales have reached a sufficiently high level, so the effect on margin improvement is limited.

Because the sales figure is such a crucial indicator,Tesla's stock price movement is also closely related to its sales volume.

Generally speaking, new energy vehicle companies release their sales figures every month, so Tesla’s sales data is usually disclosed ahead of its earnings reports. Inthe financial module on the Futu app, we can see the quarterly trend of Tesla’s car sales.

We can observe that in Q1 2022, Tesla’s sales growth almost came to a halt,and by Q2 2022, it even saw its first decline. Meanwhile, Tesla’s stock price began to plummet significantly starting from Q1 2022.

In contrast, Tesla’s sales exceeded expectations in Q2 this year, which fueled a surge in Tesla's stock price.

So why has Tesla’s sales performance been so volatile? This largely has to do with Tesla’s pricing strategy. Before Q3 2021, the prices of Tesla’s models were generally declining while demand for new energy vehicles was exploding, leading to rising sales.

Starting from July 2021, due to reasons such as rising battery costs, Tesla began to raise prices consecutively. For example, the price of the standard version of the domestically produced Model 3 increased from 235,900 yuan to 279,900 yuan, up nearly 20%. As a result, Tesla's sales faced pressure and eventually turned into a decline.

By Q4 2022,Tesla has resumed price cuts, which led to a better-than-expected surge in sales,Tesla's stock price also rose from its lowest point of $100 to once exceeding $280.

2. Change in profitability

For new energy vehicle companies, without sales there is no revenue, but ultimately what businesses pursue is profit. If profitability is weak and they only increase revenue without raising profits, investors will respond by selling their shares.

For example, among the earliest listed trio of new EV makers—Nio, Li Auto, and XPeng Motors—Li Auto was the first to achieve profitability, while Nio and XPeng’s profitability has yet to show significant improvement. As a result, Li Auto’s historical stock performance has far outpaced that of Nio and XPeng.

So how is Tesla’s profitability?It is closely related to its sales volume and pricing trends.Previously, as Tesla’s sales volume rapidly climbed, the company’s gross margin and net profit margin also increased quickly.

For instance, according to Futu app financial data, Tesla’s gross margin rose from 12.5% in Q1 2019 to nearly 30% by Q1 2022, and its net profit margin improved from -14.7% to 17.5%.

During this period, although Tesla’s overall pricing trended downward, the decline in battery costs, along with improvements in profitability brought about by economies of scale, played a dominant role.

So now, as Tesla's sales reach a certain scale,Tesla's profitability increasingly depends on changes in pricing and costs.

In the first quarter of this year, Tesla significantly cut prices while battery costs remained high, causing a substantial decline in profitability in Tesla's Q1 earnings report, with gross margin dropping to 19.3% and net profit margin falling to 10.9%.

However, Tesla's stock price performed relatively strongly in the first quarter, and one important reason for this may be that,the market expects the decline in lithium carbonate prices to gradually pass through to battery costs, which could lead to an improvement in Tesla's profitability in the second quarter.

Therefore, for the Q2 earnings report, we need to focus on observing Tesla's gross margin and net profit margin levels. If they continue to remain weak as in Q1, the stock price may come under pressure; conversely, if profitability rebounds strongly, it could be a positive signal.

3. Comparison between actual performance and market expectations

After Tesla releases its earnings report, we also need to closely monitor the comparison between actual performance and prior market expectations. For a highly followed company like Tesla, analysts typically predict the company’s financial results before the earnings release. Data from analyst forecasts can also be easily found on the Futubull app.

Do you remember NVIDIA’s extraordinary surge of over 24% in a single day on May 25 this year? The core reason was that the company’s quarterly report and earnings guidance significantly exceeded expectations.

So for Tesla’s earnings report, we will mainly focus on comparing the actual data for revenue and earnings per share (EPS) against analyst predictions.

Regarding revenue, since the sales volumes of Tesla's various models have been released in advance and the majority of Tesla’s revenue comes from car sales, analysts' forecasts for its revenue are usually quite accurate.

Another key metric, earnings per share (EPS),may exhibit greater variability and is also a point of significant market interest.If EPS beats expectations, the stock price might see some short-term gains; otherwise, there could be short-term pressure. Additionally, Tesla's management may update forward-looking information such as future sales during the conference call after the earnings release, and if they provide better-than-expected guidance, it could also boost the stock price in the short term.

Finally, to summarize, when looking at the correlation between Tesla's earnings reports and stock price movements, we need to focus on monthly sales changes, which form the foundation of the company's competitiveness within the industry. We should also monitor changes in pricing policies and profitability—continuously improving profitability over the long term ensures the company’s sustained healthy growth. If the company’s earnings consistently beat expectations, it will likely boost the stock price in the short term and instill confidence in the market over the long run.

Reminder from Earnings Expert: On July 20th at 5:30 AM Beijing time, there will be a live bilingual broadcast (in Mandarin and Cantonese) of Tesla’s earnings report. Fellow investors, let’s meet in the live stream ~ Click to reserve your spot for Tesla’s Q2 2023 earnings live broadcast (with simultaneous interpretation).

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